What is Debt Management Plan
A Debt Management Plan (DMP) is an informal agreement with creditors to reduce debt repayments. It is not legally binding. You can implement the Plan yourself or get help from a debt management company or charity.
- Find out more about a Debt Management Plan
- The Advantages and Disadvantages
- How much does a DMP cost?
- Debt Management and the Law
Want help with a Debt Management Plan? Give us a call (0800 044 5407) or complete the form below to speak to one of our experts
DMP Advantages and Disadvantages
As with all debt solutions a Debt Management Plan has both advantages and disadvantages. The importance of each of these for you will depend on your personal financial circumstances.
In terms of the advantages it is a private agreement. The Plan is also flexible so it is possible to change the payments you make at any time. If you are a home owner you are not obliged to release equity from your property to help repay your debt.
However the disadvantages of a a DMP must also be considered. I may significantly extend the time it takes to repay your debt. Your credit rating is negatively affected. Neither you or your property receive legal protection from your creditors.
What does a Debt Management Plan Cost?
The cost of a Debt Management Plan will depend on how you decide to implement and manage it. If you chose to set up and manage the Plan yourself it will just cost your time.
If you feel you would like help to start your Plan there are both fee charging and free debt management services available. Both of these options come with their own advantages and disadvantages.
How are Creditors repaid in a DMP?
The amount you pay to your creditors each month in a DMP is based on your Surplus Income. This is also called Disposable Income. This amount is divided fairly between all of the debts on a pro rata basis.
Pro Rate means that if one creditor is owed 50% of the total debt in the Plan they must receive 50% of your Surplus Income. All the debts in the Plan are paid off over the same time. Non is treated preferentially over the others.
DM4U Tip: Generally speaking all of the debts you include in a Debt management Plan will have to be repaid in full. Your creditors do not automatically agree to write off any of the debt you owe.
Debt Management and the Law
A Debt Management Plan is not legally binding. It is an informal agreement between you and your creditors. As such there is no legislation prescribing when and how the Plan can be used.
Having said that organisations offering debt management services are heavily regulated. In 2013 a Debt Management Protocol was introduced. This laid out a common standard for the way DMPs should be implemented and managed.
In April 2014 the Financial Conduct Authority (FCA) took over the regulation of all debt management service providers. They have introduced strict rules regarding debt management service provision. These include how the Plans are promoted to and managed on behalf of individuals.
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: “In Debt – Dealing with your creditors”.
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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