A debt management plan is a flexible, informal agreement between you and your creditors that helps you manage your debts and make payments at a reduced, more affordable rate. A DMP or debt management plan only covers your unsecured loans; this means it doesn’t cover your mortgage or homeowners loans. If you are struggling to pay these types of debts, an Individual Voluntary Arrangement (IVA) would be more suitable.

Read more about IVAs

A debt management plan works to create a budget that shows how much you can afford to pay towards your debts after all your living expenses and essential payments have been covered. The essential payments include utility arrears and County Court Judgement debts.

Once a budget has been put together, your DMP provider will negotiate with your creditors to lower repayments. You’ll usually make one monthly payment to your DMP provider who will distribute your payment to all your creditors.

If you are struggling to pay one or more of your unsecured debts, such as credit cards, personal loans, store credit, overdrafts and utility arrears, you could qualify for a debt management plan.

To qualify for a DMP you should have at least some disposable income in order to pay your creditors a small amount each month. This means you after paying all your essential payments, you have some money left to pay your creditors. The total amount you owe is less important than your ability to repay your debt.

It all depends on what the insolvency practitioner (or whoever is managing your DMP) can get the Creditors to agree to. As an example, a DMP could start off with a lump sum payment followed by regular payments or vice versa. It depends on the debtors personal circumstances.

Although your creditors don’t have to accept your proposed DMP, it is often within their best interest to as it means they will receive regular payments on a weekly or monthly basis. A DMP should only be recommended to help you pay off debt. Usually, if your creditors don’t accept your initial DMP, your DMP provider will continue to negotiate with them to come to an agreed plan.

The first thing you’ll need is a list of your creditors, along with their contact details and credit agreements. You’ll also need to provide an up-to-date statement of your current financial situation, including your income, outgoings and assets. Once the debt management company has this information, they’ll be able to assess your situation and put together a proposal for your DMP. In most cases, once you’ve agreed to the terms of the plan, the company will contact your creditors on your behalf and start making reduced monthly payments.

No, your debt management plan is designed to negotiate reduced monthly payments to your creditors and doesn’t require you to borrow more to pay them. The disadvantage to a debt management plan is that you are paying less over a longer period of time, meaning you are likely to pay more overall (due to accrued interest).

It’s ill-advised to borrow more money as it can limit your ability to make DMP payments.

Freezing interest on repayments would be entirely at the discretion of the creditor. Creditors would usually understand adding to the debt while you’re already in financial difficulty wouldn’t serve them any benefit.

There is no minimum fee to pay into a debt management plan. The repayments are calculated based on what you can comfortably afford.

A Debt Management Plan has two elements to its cost:

• A set-up fee that is usually the same as your first two repayments combined
• A monthly management fee that is usually a % of your monthly repayment

If you are using a private and commercial Debt Management Plan provider, you will need to pay the cost.

There isn’t a separate payment to make. The cost gets deducted from your monthly repayment. You only ever have to worry about making one monthly repayment.

A debt management plan will only last as long as reasonably needed to pay off the debts you owe to your creditors. Lowering repayments leave you in debt for a longer period but it all depends on the amount of debt you owe and how much you can realistically pay every month. The more you can allocate for your debts, the quicker you can repay them.

Your DMP provider should always request your creditors to freeze interest and additional charges on your debt, however, they have no obligation to honour the request. Some creditors may reduce the interest, while others will freeze the interest altogether.

Lowering your repayments can lower your credit rating for up to six years from the date your DMP began. However, many already have problems with their credit rating before applying for a debt management plan. It is often better for your credit rating to lower repayments than not paying debts at all.

Your debt management plan is completely confidential and only your DMP provider and your creditors will be informed. Your DMP provider is not obligated to inform any financial authority of your debt management plan.

The DMP will be cancelled and you will have to find another way to settle the debt.

A debt management plan should be reviewed yearly or whenever your financial situation drastically changes.

Buying gifts are a luxury. As a result, pausing your debt management plan to pay for these wouldn’t be possible. That doesn’t mean you can’t save for them in your budgeting to ensure you can buy gifts and continue your payments on the debt management plan.

A debt management plan will only impact the person with the debt.

A creditor can only make you bankrupt if you owe more than £5,000. It wouldn’t make sense for a creditor to make you bankrupt during your debt management plan as they’re already receiving. payments. Furthermore, a bankruptcy will cost the creditor more money, therefore it doesn’t make financial sense for them to do this.

In order to qualify for a DMP, you must be employed or have a regular income. This means that if you are retired, you will not be able to get a DMP unless you have a high enough income such as savings or a pension.