Debt Managment Plan: All You Need To Know
Most people in debt often resort to desperate measures such as selling stuff to raise some extra funds while others may opt to take up a part-time job or work extra hours in order to keep up with monthly payments.
However, all these attempts to clear debt are sometimes not enough, hence the need to enter into a reliable debt management plan which is an effective arrangement for those who may need outside help to manage their bills.
What Is a Debt Management Plan (DMP)?
Getting on a DMP involves working with an insolvency practitioner (IP) which can offer relief through their debt management plans. Basically, the debtor makes money deposits with the IP who then uses it to pay unsecured debts on behalf of the debtor based on an agreed payment schedule.
Getting on a DMP means that your creditors may agree to lower your interest rate or even waive certain fees which will help you clear your debt faster.
A DMP is typically an agreement between you as the debtor and your creditor to pay off non-priority debts such as loans, credit cards and store cards. The debtor pays back the debt by making a monthly payment, which is normally divided between the creditors i.e if you owe money to multiple creditor.
Most debt management plans are fully managed by the IP who will deal with your creditors on your behalf, which means that you will not have to deal with the creditors yourself.
How Long Does a DMP Last?
When considering getting into a DMP, it is important to know how long the arrangement will last. The duration of the DMP depends on your individual circumstances. DMPs can significantly vary in length but they mostly last for roughly five to ten years.
A DMP may therefore not be the best solution for you if it would take longer than this period to clear your debt.
Your level of debt may also be a factor that will determine the duration of a DMP, since having a high level of debt will lead to longer-lasting plans.
Another factor to consider is the amount you can afford to pay which means that the level of your disposable income (DI) will also determine the level of your DMP, so this will need to be calculated with your IP. You will need to make higher monthly payments in order to settle your debt more quickly.
If your creditor(s) agree to waive interest and other fees on your debts to help you clear the debt faster, then this will significantly reduce the length of your debt management plan. It is important to note that your creditors are not obligated to freeze interest or other fees.
In some cases, you or your creditors may decide to cancel the DMP at any time. Since the debt management plan is not legally binding, such a move may end up increasing the time it will take you to repay the debts. It is advisable to work out an estimate of how long your DMP will last using the following methods:
- Working out your level of surplus income (Money left over after paying bills)
- Working out your total level of unsecured debt
- Dividing your debt by your monthly disposable income
How Do You Qualify For a DMP?
- If you have 1 or more creditors.
- If you have unsecured debts of £3,000 or higher.
- Have a steady income, allowing you to commit to monthly payments after household bills are covered.
If you satisfy the basic criteria or you are unable to manage your monthly debts repayment to your creditors, you can opt to enroll in a DMP by making an application via a debt solution specialist. In order to qualify for a DMP, you will not need any minimum or maximum amount of debt. Anyone who feels like they are not comfortable managing their monthly debt payments is eligible to enroll in a DMP.
The application process for a DMP is pretty straightforward.
- Your DMP provider will help you through the application process by assessing your current financial situation to determine the most appropriate solutions for you.
- If debt management is the right solution for you, then the debt management company will ask you to pay an initial payment or a monthly management fee depending on your surplus income’ amount.
- The IP will not contact your lenders until you authorise them to do so. The authority will be informed of a signed document that allows the IP to take over all negotiations. Your DMP provider will not force your lenders to accept the offer they make on your behalf although most lenders will prefer to receive lower repayments on a regular basis than risk not getting paid at all.
- The IP will also need certain documents such as reference numbers for your unsecured debts and proof of your income to help them negotiate with your lenders.
What Type of Debts Can Be Used For a DMP?
Only unsecured debts will be included in your Debt Management Plan. Secured debts such as mortgage, car hire purchase or rent and council tax arrears cannot be included in a DMP. Unsecured debts that can be included in a DMP include personal loans such as those taken to purchase cars (Not hire purchase), credit cards, store cards and overdrafts.
Advantages of a Debt Management Plan
With a DMP, you only need to make one monthly payment to your credit management company thus you do not have to worry about making multiple monthly payments.
You will also be able to secure lower interest rates as your debt management provider will try to negotiate lower interest rates with your lenders on your behalf. Unsecured debts can significantly increase your average monthly payments but lower interest rates will mean lower monthly payments. Some creditors may even opt to waive interest and other fees which will help you pay your debt faster.
Disadvantages of a Debt Management Plan
You will be required to close any credit card account included in your DMP to ensure that your debt is not accumulating while you are still trying to repay your current balance. This also ensures that the negotiated lower interest rates and other DMP perks are used for their intended purpose. In order to enjoy all the benefits of a DMP, that includes a lower interest rate, you must make consistent payments otherwise if you do not, you risk losing the benefits. While most creditors participate in DMPs, some may choose not to. Those who choose to participate will ultimately determine the benefits and conditions even if your debt management provider will try to negotiate the best terms on your behalf. A DMP is ideal for those who have non-priority debts such as personal loans, overdrafts, store cards or credit cards since they get to pay off their debts at a rate they can afford. Taking out a DMP will have a negative impact on your credit score.