What is a Debt Management Plan

A debt management plan (DMP) is an informal arrangement between yourself (the debtor) and the people you owe money to (the creditors). If you are unable to pay your debts as they fall due then an affordable repayment plan is negotiated with your creditors. The offer of repayment should be fair to both you and your creditors, ensuring you have sufficient money available to cover essential living costs and priority bills each month.

A DMP mainly covers your non-priority debts. These are things like loans, credit cards, overdrafts and store cards. Priority debts, such as rent arrears, mortgage arrears, council tax and utility arrears are normally dealt with outside of the DMP. Essentially, whatever is left over after your essential living costs and priority payments have been taken into account, is then made available to your non-priority debts in the DMP. You will continue to make the DMP payments for as long as it takes to repay the debt in full.

A debtor can manage their own plan if they want to. Managing a DMP entails submitting repayment proposals, distributing payments and liaising with creditors, so often people will prefer a DMP provider to do this on their behalf.

DMPs can either be chargeable or free. There are a number of organisations that provide this service without charge. Paying someone a fee to administer a the DMP means it is likely to take longer for the debt to be repaid in full.

Financial Conduct Authority (FCA) guidance states that if someone is able to demonstrate they are in financial difficulty (being unable to meet their payments as and when they fall due) then creditors should consider stopping interest and charges. This allows the debtor to repay the debt in a controlled manner without the debt increasing or it taking longer than is reasonable. As this is just guidance, it is up to the creditor as to whether this happens or not. If your creditor doesn’t agree to do this, speak to your DMP provider or put a formal complaint to the creditor highlighting the FCA guidance.

As with any debt solution, there are advantages and disadvantages. Some of these are covered below:-

Advantages

• You will only make one monthly payment towards your debts
• This monthly payment will be an affordable amount
• Interest and charges could be stopped
• Further action should stop if you keep up the payments
• DMPs can be provided free of charge
• You have more money available for your essential living costs

Disadvantages

• The arrangement is informal so creditors may not agree to stop interest and charges
• There is no guarantee that further action will not be taken by your creditors now or in the future
• Your credit file is likely to be affected
• All of your debt will need to be paid back unlike some other solutions

As with all debt solutions, choosing the right one is key. A DMP may be the right option for one person but not appropriate for others. Taking debt advice will enable you to make an informed decision about which one is right for you.

If you would like to speak to someone about debt in confidence, you can contact one of the charity’s helpline advisers for free on 0800 043 40 50. They will guide you through the process and explain which options are available to you.