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Calculate the length of your DMP

If you are thinking about starting a Debt Management Plan (DMP) you should first calculate the length of your Plan. Doing this will help you understand if the solution is right for you. You need to remember that there is no fixed end date. The Plan will last for as long as it takes you to repay all the debt you include. The length will therefore depend on the amount you can pay towards your debt each month.

How to calculate the length of your DMP

To calculate the length of your DMP you first have to work out your Surplus Income. This is the amount you can afford to pay into the Plan each month after all of your other living expenses have been accounted for.

You then take the total amount of debt you will include in your Plan and divide this by your monthly surplus income. This will give you a good idea of the length of your plan in months. You can then divide this figure by 12 to get the length in years.

In other words if the total amount of debt you are going to include in your Plan is £15,000 and your monthly surplus Income is £150 a good estimation of the length of your Plan is 100 months or just over 8 years:

£15,000 divided by £150 = 100 months. 100 divided by 12 = 8.3 years

When you calculate the length of your DMP it can only be an estimate

After you calculate the length of your DMP you need to understand that the this will only ever be an estimate of the time it will take to pay your debt. The main reason for this is that there is no guarantee that the creditors you include in the Plan will stop adding interest and charges.

If you offer to pay as much as you can into the plan there is every chance that your creditors will agree to freeze interest. However because the Plan is not legally binding they do not have to. If just one creditor continues to add interest the amount of debt you have to repay will go up and the length of your DMP will also increase.

DM4U Tip: If you are paying a commercial service provider to manage your DMP they will keep a percentage of what you pay into your plan each month for their management fee. This will reduce the amount that is paid to your creditors and extend the length of your Plan accordingly.

Is it possible to reduce the length of your DMP?

After you calculate the length of your DMP you may be concerned at the length of time it will take to pay. However you should remember that it may be possible to reduce this.

The most obvious way of reducing the length of your Plan is to increase the amount you are paying each month. This might be possible if you get a pay rise or your living expenses fall. Either of these things would result in your surplus income going up. If you then increase your Plan payment your debt will be paid faster and the plan will end sooner.

The other way of reducing the length of your DMP is to settle your debt early. At any time during your Plan you are allowed to offer a cash lump sum to any of your creditors in return for them writing off the remainder of their debt. If you have been in your Plan for 6 months or more it is possible that any one of your creditors will accept 50% of the remaining balance in full settlement.

DM4U Tip: You do not have to offer lump sums to each of your creditors at the same time. If you only have sufficient cash to make a deal with one of them you can do so. In general the remaining creditors will not mind this because their debt will also be paid faster. As long as you maintain your normal plan payment the amount they will each receive will increase as it is shared between a reduced number of accounts.

Can you ever guarantee the length of your DMP?

You can never guarantee how long it will take you to become debt free if you use a Debt Management Plan. You are always obliged to repay your debt in full and there is no way of telling whether interest will be added or if you will be able to pay more of settle debt down the line. As such when you calculate the length of your DMP this can only ever be an estimate.

If you want to guarantee when you will be debt free you need to consider using an alternative debt solution such as an Individual Voluntary Arrangement or Bankruptcy. One of the advantages of these solutions are that you only have to make debt repayments for a fixed period of time.

With an IVA and Bankruptcy you know the end date of the solution. After this whatever has not been paid is written off. This means that on average the length of these solutions is far shorter than a DMP. Having said that they are not for everyone. You need to consider the disadvantages as well before deciding if they are right for you.

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