What is Debt Management Plan
A Debt Management Plan is an informal agreement with creditors to reduce your debt repayments. You can implement the Plan yourself or get help from a company or charity.
Included in this article:
- What happens to your debt repayments?
- How will the plan affect you?
- What does it cost?
- How to start a debt management plan
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What Happens to your Debt Repayments?
When you start a Debt Management Plan (DMP) your debt repayments are reduced to an amount you can afford. Your new payments are based on your disposable income (also known as surplus income).
Disposable income is the money you have left over from your monthly income after all of your reasonable living expenses have been accounted for. This figure is divided fairly between your creditors.
Because you are paying each creditor a smaller amount each month it can take a long time to repay your debt. An average Plan can last between 5-10 years.
Debts included in a Debt Management Plan normally have to be repaid in full. Your creditors do not automatically agree to write any off.
How will a Debt Management Plan Affect you?
A Debt Management Plan does not automatically require your creditor’s agreement to write off anything you owe. As a result other than reducing your monthly payments the effects are relatively limited.
Generally speaking assets such as your house or car are not put at risk. You are not obliged to release equity from your property. You will be able to keep your car even if it is on finance.
The agreement is private. Your name is not added to any public list and no-one is told. As a result it is unlikely that anyone will find out about your circumstances.
Your credit rating will become poor when you start a Plan. This will make it much more difficult to get new credit facilities.
What does a Debt Management Plan Cost?
The cost of your Plan will depend on how you decide to implement and manage it. If you wish you can set up and manage the Plan yourself. This will just cost your time.
If you do not want to do it yourself you can get help to start a Plan. The advantage of using a debt management service is you pay a single amount and all your creditor payments are then managed for you.
There are both fee charging and free debt management services available. Using a free service means 100% of your monthly payment goes towards paying your debt. However these providers are normally flexible and cannot help everyone.
Fee charging debt management companies can often offer a more flexible personal service particularly if you live abroad or are self employed.
How to Start a Debt Management Plan
There are a number of steps that need to be undertaken to get a Debt Management Plan in place. First you will need to calculate your disposable income. This tells you how much you can afford to pay each month.
Reduced payments then need to be negotiated with your creditors. Information will have to be provided to them about your income and living expenses to confirm you are offering to pay as much as you can afford.
Your agreed payments then need to be paid on time. If you miss payments or pay a different amount to that agreed the Plan is likely to fail.
Regular reviews of your Plan will be required to confirm whether your payments can increase. This normally happens at least once a year.
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”.
The Money Advice Service (MAS) are an independent service set up by the Government to provide people with free advice about all aspects of personal finances. For help from MAS if you are struggling with debt please follow this link:MAS – Help if you are struggling with debt.
It is also recommended that you read this one page document produced by MAS entitled “Dealing with debt – 5 things you should know”.
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