What is a Debt Management Plan?
A Debt Management Plan is an informal repayment agreement between you and your creditors to pay all of your debts.
Debt management plans are an alternative debt solution to formal arrangements, such as an Individual Voluntary Arrangement or Bankruptcy and available to residents in the United Kingdom.
How do Debt Management Plans work?
Debt management plans are normally used under these circumstances:
-You can only afford to pay a small amount to creditors each month
-You have problems with debt but will have the ability to make repayments within several months
-You can organise a payment plan with your creditors yourself, use a licensed Debt Management Company (fees are charged) or via the free sector
-Payments are made regularly to the company
-The company divides the money between all your creditors
Benefits and Considerations of a Debt Management Plan
Benefits of a Debt Management Plan
-You only pay one affordable payment to the DMP company
-Flexibility – The payment is flexible depending on your circumstances, it can increase or decrease
-Payments can be reduced & interest rates can be frozen by creditors, however, they are not obliged to do this
-Some charities & organisations provide this service free of charge (you can contact the Money Advice Service for more information)
-Avoids the need for a Formal Insolvency Procedure
-Considerations of a Debt Management Plan
-All the creditors need to agree to their individual arrangement for this plan to be effective
-Interest & charges are not guaranteed to be frozen
-Your credit rating is affected as your monthly payments are not contractual
-Debt management plans can affect your credit file for a minimum of 6 years, as in most cases you will have defaulted on the original credit agreement terms once you enter into the arrangement