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What does a Debt Management Plan Cost?

What does a Debt Management Plan Cost?

The cost of a Debt Management Plan (DMP) will depend on how you implement it. If you set a Plan up yourself there is no cost other than your time. If you want help the cost will depend on whether you use a free or fee charging service.

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The Cost of starting a Debt Management Plan yourself

If you decide to set up a Debt Management Plan yourself it will not cost you anything in terms of cash. However if you have anything more than one or two debts you need to recognise that this can take a significant amount of your time and energy.

DM4U Tip: Unless you are extremely organised and have sufficient time it might be sensible to consider using a debt management service to help you set up your DMP.

How much does a Fee Charging Debt Management Service cost?

You can use a commercial Debt Management Company to implement and manage your DMP. They will negotiate the reduced payments with your creditors and put the Plan in place. They will then manage your ongoing payments.

The company will charge a fee for this service. Normally there is a flat management fee of around 15%. The fee is deducted from the monthly payment you make into your Plan.

If you are using a fee charging service it is important to get an idea of the overall fees you will be charged. You do this in the following way:

  1. Take the monthly payment you will make into your Plan and deduct the monthly fee you will be charged.
  2. Divide your total debt included in the Plan by your remaining monthly payment (ie the payment you make less the fee). This gives you an estimate of how long your Plan will last in months.
  3. Multiply the monthly fee by the number of months you expect your plan to last. This will give you the total estimated cost of the Plan.

DM4U Tip: This calculation only gives an estimation of the cost of a DMP. If your creditors add additional interest or charges the amount you owe could go up. Your plan will therefore be extended and the cost of managing it will increase.

Can you get a Debt Management Plan for Free?

There are organisations which provide free Debt Management Plan services. These include charities such as Step Change. If you ask them to implement a Plan for you no fee will be deducted from your monthly payments.

This option may seem too good to be true as it is rare in life that we get something for nothing. Of course these organisations cannot survive on thin air. Step Change for example is funded by your creditors. The creditors pay them a percentage of all the money that you pay through the plan.

Given this it is important to ask yourself who’s interests free debt management providers really have at heart. If they are funded by your creditors then it stands to reason that they must work in your creditors best interests rather than your own.

DM4U Tip: One way to tell if your DMP is working is to check whether interest and charges have been frozen. If not then you may never become debt fee if you stay on the Plan. It is arguable that if you are paying for your Plan the company will work harder to ensure interest is frozen. This is because they want you to be happy and keep paying them.

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