DMP Advantages and Disadvantages
If you are considering a Debt Management Plan you should understand the main advantages and disadvantages. Not all of these may be relevant to you. They will depend on your personal financial situation.
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The Advantages of a Debt Management Plan
1. Private agreement
A Debt Management Plan is not a formal insolvency procedure and as such your name is not included on any formal register. This means that no-one will find out that you are in the Plan unless you chose to tell them.
2. Debt payments reduced to an affordable amount
Your Plan payments are based on your surplus (also known as disposable) income. This is the amount you can afford to pay each month after all of your other reasonable living expenses have been accounted for. As such if you start a Plan you know that you will always have enough cash from your income to pay your priority bills each month such as your mortgage or rent, utility bills and other living expenses without having to borrow more.
3. Debt Management Plan payments can be changed at any time
Because the Plan is informal it is also a flexible solution. You can change the payments you make at any time either up or down to suit changes in your personal circumstances. If your financial situation improves you can start to pay more or settle your debt in full. If your situation becomes worse you can reduce your DMP payments although this may require additional negotiations with your creditors.
4. You can stop a DMP and change to a different solution at any time
Again because of its informal nature once you have started a DMP you can stop it at any time. You do not have to give any notice to any of your creditors or the DMP company you are working with. This can be extremely useful if you only need to use your DMP as a short term solution or if you decide that your debts could be better solved with a different solution.
5. Not all your debts have to be included in a DMP
You do not have to include all of your creditors in a DMP. If you want to leave a creditor out of the arrangement and continue to pay them as normal you can do so. Having said that it is normally recommended that all creditors are included in the plan.
6. No obligation to release equity from your property
Homeowners will often chose a DMP to help resolve a debt problem 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.
The Disadvantages of a Debt Management Plan
1. All of your debt must be repaid
If you start a DMP your creditors are not obliged to write off any of the debt that you owe. This means that although your monthly debt repayments are reduced to an affordable amount you still have to repay all of your debts. As a result a DMP can significantly extend the time it takes to repay your debt.
2. Your credit rating is negatively affected
Using a DMP will mean that you default on your payment agreements with your creditors. They will record missed payments on your credit file and may also issue default notices against you which will be registered on your credit file. This will give you a poor credit rating and make it difficult for you to borrow more money in the future. Your credit rating will not start to get better until all your debt is repaid and your DMP is finished.
3. Interest and charges can still be added to your accounts
Your creditors are not obliged to stop adding interest and late payment charges to your debts while you are in a DMP. This means that some of your balances may continue to increase unless you can pay enough each month to prevent this. Once your creditors agree to your DMP they will however normally stop their interest charges as long as you maintain your payments regularly.
4. Creditors can ask for increased payments at any time
A DMP is an informal agreement. It is not legally binding on you or your creditors. This means that your creditors can request a review of your financial circumstances at any time and demand that you increase your monthly payments if they feel the payment that you are currently making is too low.
5. No legal protection for you or your property
Because a DMP is not a legally binding agreement your creditors are still allowed to take legal action against you to enforce the payment of their debt. This means that even if your creditors agree to your DMP payments they are still at liberty to apply for a CCJ (County Court Judgement) against you and an attachment of earnings or a charging order against your property if you are a home owner. Having said that creditors will generally not take this action if they have agreed to your DMP payments. Nevertheless it is a serious risk that you need to bear in mind.
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