Should I use a debt management plan
A number of factors will affect whether you should use a debt management plan. This article covers the key things you need to understand and consider.
Included in this article:
- How long will it take to repay your debt?
- What type of debts can be included?
- Do you need a flexible debt management solution?
- Will using a DMP be better for your credit rating?
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How long will it take to repay your debt using a DMP?
The first thing you should understand about a debt management plan (DMP) is how long it will last.
Unlike other debt solutions, there is no fixed end date. The Plan will continue until you have repaid all the debt you owe. How quickly you will be able to do this depends on how much you owe and what you can afford to repay each month.
So for example, if you owe £15,000 and can afford to pay £120/mth, it will take you 125 months or just over 10 years to complete the Plan. Of course, other factors might help to reduce this. Perhaps your income will increase allowing you to pay more each month. But equally, it might not.
If you have worked out that it will take you less than 5 years to repay your debt, using a DMP might be a sensible option. But if it will take much more, you may need to think about a different solution.
Work out how long it is is likely to last before deciding whether to use a debt management plan.
What type of debts can be included in a DMP?
Not all types of debt can be included in a debt management plan.
The solution is suitable if you owe money to normal commercial lenders. For example bank loans, credit cards, store credit and cash or payday loans. However, for some types of debts, this is not the case.
It is normally difficult to include debt owed to HMRC. This is because HMRC will normally demand that money owed to them (such as tax arrears) must be repaid within a maximum of 18 months to 2 years. Given most DMPs last much longer than this, the payment plan will be rejected.
Debts for which a CCJ has already been issued are also difficult to include. Unless the monthly repayment proposed in the Plan is greater than that ordered by the Court in the CCJ, the associated creditor is unlikely to accept it.
It is unlikely that you will be able to use a debt management plan if you owe a significant amount to HMRC.
Do you need a flexible debt management solution?
One of the significant advantages of a debt management plan compared to other debt solutions is flexibility.
If your income goes during the Plan, you are not legally bound to pay more towards your debt. Of course, if you can afford to increase your payments it makes sense because this will reduce the length of your Plan. But you are not forced to. You can do what ever you like with your extra money.
In the same way, if you receive a windfall such as an inheritance payment or compensation payment during a DMP, the money is yours to keep. Unlike other debt solutions, You are not forced to use any of it to pay off the debt you owe.
A debt management plan can be a sensible solution if you are a homeowner. Unlike an IVA or going bankrupt, your property is not involved. Generally speaking any equity you have is ignored and protected.
If you are a home owner with a lot of equity or know your income is likely to rise significantly in the future, a DMP may be a sensible option for you.
Will using a DMP be better for your credit rating?
You may be considering a debt management plan because you feel it will have a less less of an affect than other debt solutions on your credit rating. This is actually not the case.
In reality a DMP is likely to affect your credit score just as badly as any of the other options. This includes starting an IVA or even going bankrupt.
Why? Because every month you are in the Plan, a record will be marked on your credit file by each creditor stating you have missed the agreed payment. Regardless of the fact that they may have agreed your Plan payments, they are also likely to issue a default notice against you.
These actions will mean your credit rating becomes poor and you will then be rejected for most new credit applications including a mortgage. The situation is unlikely to improve until your Plan is completed and your debts are paid.
Using a debt management plan will not protect your credit rating. It will be as badly affected as if you had used an IVA or gone bankrupt.
Government Advice about Dealing with Debt
As well as the information found on this website the Government’s Insolvency Service has produced a useful guide to personal debt solutions which you might also find useful: “Options for paying off your debts”.
Money Helper (provided by the Money & Pensions Service) is an independent service set up by the Government to provide people with free advice about all aspects of personal finances. For further information, please follow this link: Help if you are struggling with debt.
It is also recommended that you read this one page document produced by the Money & Pensions Service entitled “Dealing with debt – 5 things you should know”.
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