DMP Advantages and Disadvantages
Understanding both the advantages and disadvantages of a debt management plan (DMP) will help you decide if this is the right solution for you.
The main things you should consider are covered in this article.
Included in this article:
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The key advantages of a Debt Management Plan
1. Flexibility – Agreement can be changed at any time
The Plan is an informal agreement with your creditors. This means you can increase or reduce your payments if your situation improves or gets worse. I addition you can stop the agreement at any time and use a different solution if you wish.
2. Not all your debts have to be included
You do not have to include all of your creditors in a DMP. You can leave a debt out of the arrangement if you want to. However this is not necessarily recommended.
3. No obligation to release equity from your property
Homeowners often chose a a debt management plan because there is no obligation to release equity from your property. However you may still wish to do so to enable you to repay your creditors more quickly if you have the opportunity.
4. Private agreement
A Debt Management Plan is not a formal insolvency procedure. As such your name is not included on any formal register. No-one will find out that you are in the Plan unless you chose to tell them.
5. Debt payments reduced to an affordable amount
Your monthly payments are reduced to a level which you can afford. This is known as your surplus (or disposable) income. It is the amount you can pay each month after all of your other reasonable living expenses are accounted for.
Using a DMP should mean you always have enough cash to pay your priority bills each month without having to borrow more.
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The key disadvantages of a Debt Management Plan
1. All of your debt must be repaid
Although your monthly repayments are reduced you still have to repay all the debt you owe. Your creditors are not obliged to write off anything for you. As a result a Debt Management Plan can significantly extend the time it takes to repay your debt.
2. Your credit rating is negatively affected
Even though it has been agreed with your creditors, the fact you are making reduced payments will be recorded on your credit file. Default notices are also likely to be issued against you. As a result your credit rating will become poor normally for the duration of the Plan.
3. Interest and charges can still be added to your accounts
Once your creditors agree to your DMP they will normally stop their interest charges. However they are not legally obliged to do this. It may take time for all of them to freeze interest and they will start adding it again if you miss payments.
4. Creditors can ask for increased payments at any time
The Plan is not legally binding on you or your creditors. This means they can request a review of your financial circumstances at any time. They may demand that you increase your monthly payments if they feel you can afford more.
5. No legal protection for you or your property
Most creditors will suspend further enforcement action once they have agreed to your reduced payments. However they can start this again at any time if you do not maintain the agreement. There are some who may still are still allowed to take legal action against you or your property.
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