What is a debt management plan (DMP)?
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 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.
When should I consider a debt management plan?
Consider a debt management plan if you’re regularly missing payments, relying on credit to cover essential living costs, or finding you have little money left after paying bills and minimum repayments.
A DMP can help you make more affordable monthly payments towards unsecured debts, such as credit cards, personal loans and overdrafts.
Free debt advice can help you assess your finances and decide whether a DMP is the right option for you.
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 don’t want to harm your credit score and potentially access to other credit, such as a mortgage.
Who can give me a debt management plan?
Debt management plans are available through free debt advice charities, such as StepChange and National Debtline, or through fee-charging debt management companies.
Private companies that provide DMPs generally need to be authorised by the Financial Conduct Authority (FCA).
Free providers can help you work out an affordable repayment plan without taking fees from your payments.
Can I set up a debt management plan myself?
Yes. A DMP is an informal arrangement, so you can contact your creditors directly to propose affordable monthly repayments. However, a free debt adviser can help you assess your options, calculate what you can afford and communicate with creditors.
Can creditors refuse or still chase me during a debt management plan?
Yes. A debt management plan (DMP) is an informal agreement, so creditors don’t have to accept it and can still contact you about outstanding debts.
Even if a creditor initially agrees to your DMP, they may later change their position, request higher payments or resume collection activity. If a creditor refuses to participate, they can continue chasing the debt and may take further action.
If you’re struggling with contact or payments, seek free advice from a debt charity such as StepChange, Citizens Advice or National Debtline.
What are priority and non-priority debts?
Debts are generally split into priority and non-priority debts and DMPs are generally designed for non-priority debts. Priority debts can have more serious consequences if you don’t pay them, so they should usually be dealt with first.
Priority debts include:
Mortgage or secured loan arrears – you could risk losing your home
Rent arrears – you could risk eviction
Council tax arrears – your council can take enforcement action
Gas and electricity arrears – you could risk disconnection in certain circumstances
Court fines – non-payment can lead to further enforcement action
Child maintenance arrears – enforcement action may be taken
Income Tax and National Insurance arrears – HMRC can take steps to recover what you owe
TV Licensing penalties – unpaid court fines relating to TV Licensing can lead to enforcement action
Non-priority debts include:
Credit cards – including store cards
Personal loans – unsecured borrowing from banks or other lenders
Overdrafts – money owed on an overdraft facility
Buy now, pay later (BNPL) – unpaid balances with providers such as Klarna
Catalogue and mail-order debts – outstanding payments for goods bought on credit
Unsecured loans from family or friends – money borrowed privately
Water bills – these are generally non-priority debts in England and Wales, although unpaid bills can still lead to court action
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.
This may mean that taking out a mortgage or remortgaging on an existing property becomes more expensive.
Can I include joint debts in a debt management plan?
Yes, you can include joint debts in a debt management plan, but both people remain legally responsible for the debt.
This is known as being ‘jointly and severally liable’, meaning the creditor can pursue either person for the full amount owed.
If only one of you enters a DMP, the creditor can still chase the other person for payment. If you’re both struggling, you may need separate DMPs.
What are my alternatives to debt management plans?
If you’re 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. 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 loan. These loans allow you to 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 introductory credit card 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:
Senior Content Editor
Our expert says...
A debt management plan can help if you’re struggling to keep up with unsecured debt repayments, but it’s important to understand the implications before committing. DMPs are informal arrangements, so creditors don’t have to agree to them and can still pursue the debt. Always prioritise essential bills and seek free debt advice to check whether a DMP is the right option for your circumstances.
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Author
Tim Heming
Personal Finance Expert
Tim Heming is a journalist and editor who has written about personal finance for national newspapers and consumer websites for 15 years. Tim enjoys providing no-nonsense information to help consumers...
Reviewer
Alan Cairns
Senior Content Editor
Alan breaks down money, home, and energy topics into plain English to help you save money. Ask him about pound cost averaging or Balkonkraftwerk.
