How are Creditors repaid in a DMP
A Debt Management Plan allows your creditors to be repaid over a longer more affordable period of time. However, eventually you still have to repay everything you owe in full.
Included in this article:
- How much will you repay your creditors in a DMP?
- How is your monthly payment divided?
- Repaying creditors early during a DMP
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How much are Creditors repaid in a Debt Management Plan?
The basic fundamental of a debt management plan (DMP) is your creditors are still repaid everything they are owed. However the payments you make each month are reduced to an amount you can afford.
A DMP simply makes it far more managable to pay back your debt if your income has fallen or other circumstances have left you struggling.
The reduced payments you make are based on your disposable income (also known as surplus income). This is the amount that you have left over from your income each month after all of your reasonable living expenses have been accounted for.
Your creditors will usually agree your reduced payments if they can clearly see that you simply can’t afford any more. That you are making your best effort to pay as much as you can.
How is your Monthly Payment divided between your Creditors?
Each of the creditors included in your debt management plan receives a fair share of your monthly payment. This is calculated on a Pro Rata basis.
In other words they are paid proportionally dependent on the amount of debt they are owed.
For example, lets say your total debt is £20,000 and this includes one creditor owed £5,000 – 25% of what you owe. They will receive 25% of your payment each month.
The Pre Rata method of repaying creditors means that they are all paid back at exactly the same speed, over the same time period.
In a standard DMP, non of your creditors is repaid sooner than the others. They are are all treated fairly and equally.
Can Creditors be repaid early during a Debt Management Plan?
A Debt Management Plan is not a legally binding debt solution. As such there are no legal rules regarding when and how you should repay your creditors.
This means you can repay one or more of them early if you want.
If you can afford to pay more each month, you can pay all of this to a single creditor. As a result, they will be repaid sooner than the others.
This process is known as snowballing. It allows you to pick off one account at a time. It is very useful if you need to deal with a creditor who continues to add interest or is threatening additional legal action.
Early repayment of one or more of your debts during your Plan can also achieved by offering a cash lump sum to settle the amount outstanding. This can significantly reduce the time that your Plan lasts overall.
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