A Debt Management Plan (DMP) is a way of paying off debts that have become out of control because they take up too large a proportion of your income. They are usually arranged my a third-party organisation, who will calculate the total level of debt and set that off against the total level of income. They will then enter into negotiations with lenders and arrange more realistic payment plans.
If a lender takes legal action against you to recover unpaid debts and it is obvious that you cannot afford to pay, the County Court can also instigate a Debt Management Plan. To do this, they will take into account essentials, such as mortgage, rent, utilities and transport and will make a repayment order based on the amount you have left over each month. They will also freeze any interest so that your debts do not get even greater.
How Do I Set Up a Debt Management Plan?
The CAB and National Debtline are your first ports of call for free, impartial advice. There are also a number of fee-paying debt-advice agencies who will not only work out what you can afford to pay and negotiate with your lenders but will also administer your reduced payments – you pay the money to them and they pass it on. Typically you can expect to pay one of these companies around 15% of your regular payment as their fee, plus set-up fees. However, banks and credit card companies tend to look more favourably on applications made on your behalf by these agencies.
What are the Advantages and Disadvantages?
Making reduced payments means it will take longer for you to clear your debts, however, you won’t have to deal with your creditors – you simply refer them to your debt management agency. Remember too that there is no guarantee that your creditors will accept a reduced payment plan or freeze the interest. Having said that, most of them do because this is their best hope of getting paid.
You should be aware that your credit reference file will show details of the debt management plan, which could affect your ability to gain credit in the future.