Is Debt Management appropriate for you
Whether or not a Debt Management Plan (DMP) is appropriate for you will depend on how much you can afford to pay and who you owe money to.
Included in this article:
- What can you afford to pay into your Plan?
- Who do you owe money to?
- Are you a home owner?
- Will your credit rating be affected?
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What can you afford to pay towards your debts?
A debt management plan allows you to reduce the payments you make towards your debts to an affordable monthly amount. So how do you work out what this amount is?
First, add up your total monthly income figure (including any wages, benefits and other payments you receive). Then deduct your total monthly living expenses. The amount you are left with is called your surplus or disposable income. This is what you can afford to pay into your plan.
Once you know how much you can pay each month, you can work out how long the Plan will last. Just divide the total of your debt by the monthly payment you can afford. Then divide this by 12 to get a total in years.
If based on the monthly payment you can afford your debt management plan will last longer than 5 years it may not be appropriate for you. An IVA might be a better option.
Who do you owe money to?
When deciding if a debt management plan is right for you it is also important to consider who you owe money to. Only unsecured debts can be included. These are things like credit cards, catalogues, bank and payday loans.
Secured debts such as your mortgage or car finance can’t be included. You have to continue to pay these. To ensure you are able to do this make sure you have included enough to cover them in your living expenses budget.
HMRC debt can’t be included in a DMP unless the amount owed is small. If you have significant tax arrears or tax credit debt you will normally need to agree a separate payment plan with HMRC do manage these.
If any of your creditors have already issued a CCJ against you may have to pay this separately or apply to the court to reduce the monthly payment amount.
What happens to your house in a debt management plan?
If you are a home owner one of the advantages of debt management is that your property is not included in the agreement. Of course you have to keep paying your mortgage but it does not matter whether you have equity or not.
You are not required to sell your home or release equity to help pay your debt if you don’t want to. As such this can be an ideal solution for you if you have significant equity which you do not want to or are unable to access.
A DMP does not give you any legal protection from your creditors. Therefore even after your Plan is set up an aggressive creditor could still apply to secure their debt against your home. However where yours are normal banking creditors this action is unlikely.
If you have an aggressive creditor such as a trade supplier or HMRC, debt management may not be suitable. Call us for more advice (0800 044 5407) or complete the form below.
How will your credit rating be affected by Debt Management?
Using a DMP will seriously affect your credit rating. This is the case even if your creditors agree to the Plan. They will still record that you are making reduced payments on your credit file.
As a result of this your credit rating will become poor. You will then find it difficult to get new forms of credit such as car finance.
Your credit rating will not start to improve until your debts are paid or settled in full. This could take many years if your plan is likely to last for a long time.
If one of your creditors issues a default notice against you this will remain on your credit file for 6 years. After this the record of the debt will drop off your file whether it is paid or not. This will help to improve your credit rating.
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