Is A Debt Management Plan (DMP) Right For You?

What is a debt management plan?

A debt management plan or DMP is a debt solution in the shape of an agreement between the debtor and their creditors as a result of the debtor's financial difficulties when the previously agreed contractual (e.g. usually via a loan agreement) payments cannot be made.

A brief history lesson

DMP's were originally a U.S. invention and introduced into the UK by the CCCS (Consumer Credit Counselling Service) in the early 1990's, at a time when there was dramatic expansion of the personal credit market and unsecured lending was facing sever problems.

Debt management plans were traditionally arranged by the County Courts after a lender (usually a finance company) appealed to reclaim the money they lent to a borrower (who had defaulted on their repayments). For borrowers who are in genuine difficulty, the court could order repayments which are based on their repayment ability by listing all their debt in order of priority, e.g. the borrower's essentials like mortgage repayments and utility bills would come first. The court then sets aside a reasonable amount of money for cover these essentials like food and clothes, and a repayment order is then made which is based on the balance owed.

One size fits all?

DMP's are not the perfect solution for all cases either. There is no one catch-all debt solution for all situations. Your current financial situation will be the single most important indication of the whether it's right for you. For instance, depending on the level of debt, a more formal and legally-binding agreement (like an IVA or bankruptcy) could well offer a better solution, but also has the downside of being more restrictive and damaging to your credit score.

Debt management plans are however a good option if your current financial problems are only temporary and your situation will improve in the near future. They can be certainly be more difficult if there isn't likely to be any improvement in your repayment ability within the next 12 months. Remember that there's absolutely no guarantee that your creditors will accept reduced payments so you could still face court action.

How to set up a DMP

You will find a wide range of information available online to help you with your debt problems by setting up a debt management plan, so you should check what your options are before you can make the right choice in your situation. If you're considering a debt management plan, you could arrange it yourself. The following are a few simple steps which you can carry out to set-up the DMP:

1. Make a budget

The best way to begin to sort out your current financial distress is to make a detailed budget, so you have a good understanding of where all your money is going out and coming in from. By using a budget planner listing your current income, expenses and debts, you can quickly see what areas in your budgeting where you are spending much more than your income and have a better idea of how much money you will have leftover after essentials (e.g. priority bills) to repay your debts.

2. Contact your creditors

Speak with each creditor and make a request to accept lower monthly repayments that can be made from any surplus amount you have.

Debt management companies do not have magical powers where they can miraculously make all your debts vanish into thin air. However, creditors will certainly consider them more seriously than individuals acting for themselves. You could if you wish to make your own arrangements to freeze interest rates and arrange your own payment plans. Using the techniques on your own, you can see what's available and it should also help you to understand what debt advisor's actually do.

Should you use a third party?

On an individual basis, setting up debt management plans can be a complex procedure and it may have a number of difficulties, for example, negotiating with the same lenders who have been sending you demand letters or making unexpected phones calls for their money. if you're in a fragile state of mind then this can be all too much for you to contemplate.

For this reason and more, it's recommended to use a third party to arrange a debt management plan by acting on your behalf. This intermediary (debt management company) can act as a buffer between you and your creditors. At a time of stress and worry, when lenders and debt collectors are constantly ringing you with their demands, the debt company can act in your best interests.

Another benefit of an intermediary is their relationships with your creditors. As they are likely to arrange many thousands of debt management plans every year, they are in a much better position to be able to negotiate with your lenders.

Having well-managed debt management plans and a clear framework for paying off all of your debt can certainly offer you breathing space you're looking for. It ensures you will have the money for everyday essentials, instead of feeling pressured in paying their creditors first.

If you would like more information on additional options or just tips on how to deal with debt problems, just contact us.