How a Debt Management Plan Can Help You Manage Your Debt?

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If you owe money to your creditor and struggling to keep up with the debt payments, a debt management plan may be right for you. A debt management plan, or DMP, is a type of repayment plan, that is managed by a third-party organisation that specialises in helping people with debt.

Before you decide to enter a debt management plan you should understand it in detail. We will cover the plan in detail in this article.

What is a Debt Management Plan?

A Debt Management Plan is an informal agreement between you and your creditors about your debts. A debt management plan (DMP) helps you to manage your debts and pay them off at a more affordable rate by making reduced monthly payments. The debt management plan provider will manage your debt on your behalf and deal with your creditors directly.

It isn’t legally binding, unlike other debt solutions, such as an Individual Voluntary Arrangement (IVA) or a Trust Deed. With a DMP, your monthly payments are proposed based on what you can reasonably afford.

How does a debt management plan work?

You’ll deal with a third-party provider, such as a debt charity or a debt management organisation if you decide to use a debt management plan (DMP). Your DMP provider will assist you in creating a budget before establishing your plan. They’ll also help you to understand your options, and then talk to creditors on your behalf to work out a new payment plan. Creditors may agree to waiver fees and lower interest rates. This will demonstrate how much you can afford to pay toward your debts once all of your priority payments and living expenditures have been met.

If there’s any money left over after your living costs are covered, you’ll share this out fairly between your creditors. Usually, you’ll make a monthly payment to your DMP provider, and they’ll pass on the correct payments to your creditors.

Which debts can I pay off with a Debt Management Plan?

You can only use a Debt Management Plan for non-priority debts, such as |

overdrafts
personal loans
bank or building society loans
money borrowed from friends or family
credit card, store card debts or payday loans
catalogue, home credit or in-store credit debts

Which debts can’t I pay off with a Debt Management Plan?

You can’t use a Debt Management Plan to pay off priority debts, such as |

court fines
TV Licence
Council Tax
gas and electricity bills
child support and maintenance
Income Tax, National Insurance and VAT
mortgage, rent and any loans secured against your home
hire purchase agreements, if what you’re buying with them is essential

How long does a debt management plan last?

The length of your debt management plan is mostly determined by the amount of debt you have and the amount you can pay each month. However, because DMPs are flexible, if your income rises or you get a new job, you may be able to increase your monthly payment and work toward paying off your debt sooner.

Because a debt management plan is an informal agreement, you are not obligated to stay on it for a set amount of time and can cancel it at any time.

What are the advantages of a DMP?

If a DMP is suited to your situation, there are some advantages |

As it is an informal solution, your DMP won’t be recorded on an insolvency register.
A DMP shows you are willing to pay your debt in full, so your creditors will look at this more favourably.
Creditors can freeze interest and charges on your debts.
You’re not tied into the agreement, so you can leave the DMP agreement if you want to
DMPs are flexible, so they can be adapted to suit your situation if your income or living costs change
For the most part, DMPs are flexible – allowing changes to be made if your situation changes.
They reduce your monthly payments to your debts.
You can have less contact with your creditors if you opt to use a third party as they will deal with them on your behalf.

What are the disadvantages of a Debt Management Plan?

It can take you a long time to pay back your debt.
It’s not guaranteed that your creditors will freeze interest and charges.
You are still liable for your full debt level.
It isn’t guaranteed that your creditors will accept the offer of reduced payments.
Creditors can still take legal action against you.
Your creditors are not obligated to stop contacting you, unlike other debt solutions like IVAs or Trust Deeds.
Some private DMP providers will charge fees for the service, which can extend the length of the plan.
Your credit score could be negatively impacted, making getting further credit more difficult and expensive.

How to get a DMP?

If you’ve decided that a DMP is best for you, follow these steps to get one started |

make sure you’ve sorted out your priority debts first
work out your budget to see if you have enough available income to make your monthly payment
choose a debt management company authorised by the Financial Conduct Authority (FCA), remembering that you can choose a free provider
The company works out your monthly payments. You’ll have to give details about your financial situation, for example, your assets, debts, income, and creditors.
The company contacts your creditors and asks them to agree to the plan (they do not have to)
check the agreement or contract carefully

Unless stated in the agreement, your creditors can still |

ask you to pay your full debt at a later date
take action to recover their money even if you keep up your payments

Costs

Some companies will charge |

a setup fees
a handling fee each time you make a payment
Make sure you understand the costs of your plan and how you pay for it.

Eligibility

Debt Management Plans can only be used to pay ‘unsecured’ debts, for example, debts that have not been guaranteed against your property

Your responsibilities

Your plan can be cancelled if you do not keep up your repayments

Summing-up

If you’re having trouble covering the cost of your monthly debt repayments, can’t keep up with payments to various creditors, or would like a third party to deal with creditors on your behalf, a DMP may be an option worth considering.

It’s always best to talk things through with an experienced debt adviser before you decide to take out a Debt Management Plan. Debt advisers can help you make the right decisions, which means you might be debt-free sooner than you thought. If you are looking for an experienced debt advisor to talk about your finances, you can talk to Shergroup’s debt management specialist today, online or by phone, who will be able to help you start sorting out your financial problems.

Check out our debt recovery solutions here | https://shergroup.com/debt-recovery-solutions/