What is a debt management plan (DMP)?
Get the inside line on Debt Management Plans (DMPs) and see if they could help you get on top of your debts.
Key takeaways
A Debt Management Plan (DMP) consolidates debts from credit cards, bank loans, and other non-priority debts into one monthly repayment
Consider that some creditors may not cooperate, interest rates may not always be reduced and spreading repayments over a longer period can affect your credit record
The duration of a DMP depends on the amount of debt and your repayment capacity, potentially lasting up to 10 years, increased income or reduced expenses can shorten this period
Alternatives to DMPs include the Debt Respite Scheme (Breathing Space), Individual Voluntary Agreements, bankruptcy, administration orders, debt consolidation loans, and credit card consolidation
What is a debt management plan?
A debt management plan is a way to consolidate debts from products such as credit cards, bank loans and student loans, as well as benefit overpayments, into one monthly repayment.
When you agree a debt management plan (DMP), a DMP provider, or debt management company, will deal with your creditors, sending them the money owed from the monthly payment that you make.
Unlike an Individual Voluntary Agreement (IVA), a DMP is not a legally binding debt solution, but it can help reduce monthly costs, with interest and charges on some debts potentially reduced, allowing you to budget better.
The idea is to help you make essential payments, such as a mortgage or rent, council tax and energy bills, without the undue pressure of lots of debt.
What to consider before turning to a debt management plan
It’s important to weigh up the pros and cons of taking out a Debt Management Plan before you opt for one.
While a DMP has the benefit of putting all your debts under one payment plan and can allow you to pay off essential bills, you need to be aware that there can be pitfalls too.
Some creditors may decide not to cooperate and therefore be unwilling to be part of the DMP. You may also be charged the same interest on debt if creditors do not agree to lower it as part of the plan.
Remember that spreading your repayments means it may take much longer to pay off your debt and that your credit record may be affected.
On the plus side, having a single company to manage your debt should make it easier to stay on top of. Just be aware that some, but not all, DMP providers charge for their services.
Before you choose to take out a DMP, be sure to consider your budget and work out how much you can afford to pay back after you have covered household costs and any other debts that cannot be included in the DMP.
Mortgage or rent arrears, energy bill debt and other essentials are not usually covered by a DMP. That’s because these are called priority debts, ones which if you fail to pay can have greater consequences.
How do debt management plans work?
Debt management plans work by placing your debt from items like store and credit cards and bank loans into one monthly payment.
This payment is collected by a debt management plan provider, which you can choose yourself. This money is then distributed to your creditors, with the DMP provider speaking with them on your behalf. It is a voluntary arrangement and, as such, is not legally binding.
However, some creditors may decide that they do not want to be part of your DMP. This means you may need to repay your debt to them separately.
Debt management plans do not cover debts related to mortgages or rent, council tax or energy bills. You should check directly with your DMP provider to see what kind of debt can be included in your DMP.
Am I eligible for a debt management plan?
If you have debt from credit cards, bank loans and other non-priority bills which cannot be paid, then you are eligible for a DMP.
Before you take one out, it’s best to speak with a debt management specialist or someone from services such as Citizens Advice. They can then help you choose the best course of action.
Remember, just because you are eligible doesn’t mean you have to choose a DMP. You may want to consider whether you can afford to pay your debts in their current form, especially if you do want to harm your credit score and potentially access to other credit, such as a mortgage.
How will a DMP affect my credit score?
It is highly likely that a DMP will be shown on your credit file at your creditors’ request, which may make it more challenging to take out any other credit, including a mortgage. This is called a DMP flag.
That said, by making the DMP payment every month, you will be able to demonstrate your ability to manage your finances, which will look much better than simply having lots of unpaid debt on your file.
It’s worth remembering that even after you have paid off your DMP, it may still appear on your credit file, so you may need to provide additional financial information when taking out a new credit product.
How long will the debt management plan last?
Debt management plans, which are regulated by the Financial Conduct Authority (FCA), can last for an indefinite period of time. If you have large amounts of debt, this could be up to 10 years. If you can only afford a small amount each month, you may find that it takes longer to finish your DMP.
However, you can shorten the time if your income increases or you have the ability to pay off more thanks to other bills falling and your budget being less restricted.
Can I get a mortgage whilst on a DMP?
While it’s not impossible to get a mortgage on a DMP, you will find it much harder to do so than if you were not in debt.
Lenders are likely to undertake a more fastidious financial background check if you have a DMP and will probably charge higher interest compared with their best deals. This may mean that remortgaging is much more expensive.
What are my alternatives to debt management plans
If you’re really struggling with large amounts of debt, there are other options, or debt solutions, out there. These include:
The Debt Respite Scheme - Also known as Breathing Space, this lasts for 60 days, during which creditors cannot contact you about your debt, take enforcement action or add any charges or interest to your debt. You’ll still need to pay your debts, however. A debt adviser can apply for you, although some may charge. It is available in England and Wales.
Individual Voluntary Agreement (IVA) or bankruptcy - these approaches will help you write off some or all of your debt, but can impact any assets you have, including your home, and will likely hamper your future finances.
Administration order - for debts less than £5,000 for those subject to a county court or high court judgement, you can make a monthly payment to the court to cover your debts. The court will decide how much you should pay and for how long. Creditors cannot take any more action without the court’s permission.
Debt consolidation loans - these loans put together existing debt into one consolidated lump, which you then pay monthly. This can lessen interest and make budgeting easier
Credit card consolidation - like debt consolidation, this sees all credit card debt come under one card. Some deals offer 0% for a set period, so you can make repayments without the worry of extra costs
What happens if I default on a debt management plan payment?
If you default on your debt management plan payments, several things could happen. One could be that your default will be recorded on your credit report. Another might be that your creditors opt to no longer co-operate with your DMP.
Where can I go for debt advice?
Recommended sources for debt advice include:
Citizens Advice
StepChange
National Debtline
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