We’d all prefer to live without debt, but for most Brits, it is not the reality. When debt repayments become difficult to make that’s when disaster can strike. In this series, I will explore five possible solutions to crippling debt, beginning with Debt Management Plans.
According to their latest research, Comparethemarket.com says:
‘The average person with debt is in the red by over £8,000 (excluding mortgage repayments)..’
Today, debt is widespread. Years ago, people were very ashamed of having debt. Now it’s unusual not to carry any (non-mortgage) debt.
The effect of having challenging finances and spiralling debt can be profound. If you find yourself overwhelmed, please seek help from any of the organisations listed at the end of this article. They are there to help you.
Not all options in this series will suit your circumstances. Please seek professional advice.
Part One in This Series Looks at One Possible Solution to Crippling Debt – Debt Management Plans
A Debt Management Plan (or DMP) is an agreement made between you and your creditors to repay your debts.
You pay the organisation one monthly payment who then apportion it among your creditors.
The debt-management organisation calculates what you must pay. They base this on what you can afford.
Once a DMP is in place, most debt management organisations will continue to communicate with your creditors so you need not do it. This may be a great relief to you if hearing from creditors is causing you stress.
A Debt Management Plan may be useful to you if what you can afford to pay each month is less than what you’re paying now.
DMPs Aren’t Suitable for Every Debt
A Debt Management Plan can only include ‘non-priority’ (less urgent) and unsecured debts, e.g.:
- Credit card debt
- Home catalogue debts
It cannot include ‘non-priority’ (more urgent) debts, e.g.:
- Mortgage arrears
- Council tax arrears
- Energy bills.
So you need a separate plan to tackle any ‘priority’ debts before setting up a DMP.
Are Debt Management Plans Free to Arrange?
You can pay a company a fee to set up and manage a Debt Management Plan for you. Sometimes, they’ll take part of your payment as a handling fee each time they pay your creditors. There are money advice organisations and charities that will take care of this for free. By talking to an experienced debt adviser, you can also get help to see if you’re entitled to any benefits or allowances. If you pay a company to manage your DMP, please make sure they are Financial Conduct Authority (FCA) regulated.
You will give the debt management organisation information about:
- what you owe and to whom,
- your income,
- any assets, etc.
They will then contact your creditors and see if they’ll agree to the repayment plan. Even if they agree, unless it’s stipulated in the agreement, your creditors could demand full payment of the debt at any point.
If You Have Joint Debts
If you don’t keep up your DMP payments, the plan may be cancelled. Therefore, it’s important that you understand what you will be committing to paying.
Other Things to Consider Before Setting up a Debt Management Plan
- Your creditors don’t have to agree to a DMP, (though many often do).
- As you’ll be paying a lower amount each month, the total debt will take longer to repay.
- Your creditors may decide not to freeze the interest or charges on your debt. This means it’ll take longer to clear.
- The Debt Management Plan will show on your credit record. This might mean getting future credit more difficult.
- DMPs aren’t binding, so you can stop it at any point.
Debt Advice Resources:
I’d be very interested in how many people know of Debt Management Plans. Had you heard of them before this? Is it something you would consider? Ever used a DMP yourself? Was it helpful? If you’re not comfortable leaving a public response, then you can send me a private message here.