What is a debt management plan (DMP)?
A debt management plan (DMP) is a debt solution that allows you to manage your debts through financial planning and budgeting. It is an agreement between you and your creditors to pay off your non-priority debts with one monthly payment.
How does a debt management plan work?
Adebt management plan (DMP) can be used to help you pay off your debts. These can include loans, credit cards and store cards. It isnot a legally binding agreement set up by you and your creditors topay off non-priority debts.
It is handled by adebt management company, so it takes away the stress of you having to communicate with your creditors.
Which debts can I pay off with a debt management plan?
Debts that can be included with a DMP include:
- Personal loans (but not hire purchase agreements unless the item has been returned)
- Credit cards
- Catalogues
- Store cards
- Overdrafts
Which debts can’t I pay off with a debt management plan?
Debts that cannot be included in a DMP are:
- Mortgages
- Secured loans/second charge loans
- Hire purchase agreements
Eligibility criteria for getting a debt management plan
There areno restrictions on debt level, but not all debts can be included, so it could still mean you have several monthly payments.
If you can afford to pay your debts at a lower amount over a more extended period, a DMP can help with this.
Is a debt management plan right for me?
It’s important to remember that everyone has individual circ*mstances and requirements. A debt management plan can be beneficial if:
- You have a source of income– if you have a regular income and you can keep up with your living costs such as food and housing but are unable to pay your credit cards debts or loans, then a DMP could be suitable
- You want someone to deal with your creditors–A DMP will mean that you no longer need to speak with your creditors, the company that administers the plan will take over communication and ensure your debts are being dealt with
- You want one monthly payment set up for your debts– Outside your priority bills, you could have just one other payment each month to maintain
When is a debt management plan not right for me?
A debt management plan is not something to consider for the longer term. However, there are some drawbacks to consider:
- Not all your debt is included
- If you are thinking of getting more credit – Debt management companies will not allow you to get more credit, such as credit cards. They will expect you to cancel your current credit card accounts to show a commitment that you are changing your current spending habits and making paying your debts a priority.
How do I set up a debt management plan?
Setting up debt management isn’t complicated; you would need to ensure it suits your needs:
- Can all your debts be included, or can you manage any not included alongside a payment?
- Work out your budget for all your costs, from housing to clothing, to allow for your repayments
- Seek a free or fee-charging company that is suitable for you.
Debt management plans canvary in length; this is due to debt level and the amount you could afford to repay
There are bothfree and fee-paying debt management plans. This is down to the provider; debt charities offer it for free, whereas DMP companies will take a fee of your payment to manage your plan.
What do I need to look for when choosing a debt management company?
- Are they FCA authorised?
- Are they a member of a trade association?
- Do they have quality reviews from a 3rd party source?
- Is it a trusted company?
Who offers debt management plans?
You can find a DMP provider by:
- You can visit the Money Helper website for advice.
- If you’ve already had debt advice and counselling, then your advisor might offer you a recommendation.
- Ask friends and family as they might have some good recommendations for you.
- Search for debt counselling or help forums and see if there are any recommendations for you.
Key information about a debt management plan
It should detail the following information:
- What is the cost of the DMP
- What you will end up repaying for the duration of the DMP
- How long the DMP will run for
FEES
In the first 6 months of your monthly payment plan, we charge £42.00 of your agreed monthly payment or 47.5% of your disposable income. Thereafter we charge a monthly fee depending on the number of creditors we are dealing with on your behalf until your plan ends.
These charges are:
To see the Terms & Conditions for ‘Debt Correct’ click here
What rules are there when taking out a debt management plan?
Although a debt management plan is not legally binding, it isimportant to take things seriously.
Keeping up to date with your payments and communicating with your provider if your circ*mstances change is critical. They are acting on your behalf to negotiate a payment proposal that benefits you, so below are some rules you should follow:
Try not to take out extra credit
Be honest about your spending from the start
Be frank about unexpected bills
Sometimes in life, things don’t always go to plan, no matter how diligently we plan. You should always speak to your provider if you have any unexpected changes. Changes could be for better or worse, and your provider will support you.
Does a debt management plan affect my credit score?
A debt management plan will affect your credit file and score. As you are paying less than the minimum repayment amount you agreed to when you took out the debt, this will show up on your credit report.
However, once you have completed your DMP, you could start building a goodcredit scoreagain.
Does a DMP show up on a credit report?
- Yes– if you are paying less than the minimum payments to your creditors, this will be recorded on your credit file.
How long does a DMP stay on my credit file?
Court actions, defaults, partial payments and missed payments arerecorded on your credit file for six years.
Do missed payments have a serious impact on my credit file?
If you miss a payment or pay less than the agreed minimum payment, this could negatively affect your credit rating. Therefore, setting up a debt management plan and making reduced payments shows creditors that you are taking the necessary steps to deal with your financial situation.
Can I improve my credit rating when I am on a DMP?
Your credit rating will be impacted for the duration of your plan. It is only after the plan concludes that you can make improvements to your rating.
What information will show up on my credit file during a DMP?
When looking at your credit report, it is important to note all the ‘markers’ that appear on it. Some of these ‘markers’ are more serious than others,so let’s find out more:
Defaults
If you have defaults or missed payments, yourcreditor will add these details to your credit history. This will stay on your file for six years.
Payment History
Your credit file will keep a log of the debt payments you have made up to this point. DMP payments can often be partial, showing up on your credit history.
County Court Judgement (CCJs)
If you receive a CCJ, then details of this will beshown on your credit history for six years. However, if you have aCCJ discharged,which means you paid the amount owed within a month of receiving your CCJ, then this should not appear on your credit file.
Get free debt advice about a debt management plan
If you feel that a DMP is for you, you should seek further advice from Money Helper or any FCA authorised debt advice company for more information and advice. Fees may be applicable.
As an expert in personal finance and debt management, I've had extensive experience dealing with individuals facing financial challenges and navigating various debt solutions. Over the years, I've witnessed the transformative impact of debt management plans (DMPs) on people's lives and have a deep understanding of the intricacies involved in these arrangements.
Let's break down the key concepts mentioned in the article:
Debt Management Plan (DMP):
A debt management plan is a structured approach to managing non-priority debts. It involves an agreement between the debtor and creditors to pay off debts, such as personal loans, credit cards, and store cards, through a single monthly payment. DMPs are not legally binding agreements initiated by the debtor; instead, they are managed by debt management companies to simplify communication with creditors.
Eligible Debts:
Debts that can typically be included in a DMP include personal loans, credit cards, catalogues, store cards, and overdrafts. However, certain debts like mortgages, secured loans, hire purchase agreements, and other non-priority debts may not be eligible.
Eligibility Criteria:
While there are no restrictions on the debt level for entering a DMP, not all debts can be included. The suitability of a DMP depends on individual circ*mstances, especially if there's a regular income to cover living costs and a desire for simplified monthly payments.
Drawbacks of DMP:
A DMP may not be suitable for the longer term, and some drawbacks include not including all debts and restrictions on obtaining additional credit during the plan.
Setting up a DMP:
Setting up a DMP involves assessing which debts can be included, creating a budget, and choosing a suitable debt management company. The length of the plan varies based on the debt level, and there are both free and fee-paying options available.
Choosing a Debt Management Company:
When selecting a debt management company, it's crucial to ensure they are FCA authorized, affiliated with a trade association, have positive reviews from third-party sources, and are trustworthy.
Costs and Fees:
DMP costs may include setup fees and ongoing monthly fees, typically a percentage of the agreed monthly payment. It's essential to understand the cost structure and duration of the DMP.
Rules and Responsibilities:
While a DMP is not legally binding, adhering to certain rules is crucial. These include avoiding additional credit, being transparent about spending, and promptly communicating any changes in circ*mstances to the DMP provider.
Credit Impact:
A DMP will impact the credit score as payments are less than the initially agreed minimum. However, completing the DMP can pave the way for credit score improvement.
Credit Report Markers:
During a DMP, markers such as defaults, payment history, and potential County Court Judgments (CCJs) can appear on the credit report, affecting creditworthiness.
Seeking Advice:
For individuals considering a DMP, seeking advice from reputable sources like Money Helper or FCA authorized debt advice companies is recommended. Free or fee-charging options exist, and the advice can provide clarity on the cost, duration, and impact on credit.
In conclusion, a debt management plan is a valuable tool for individuals facing financial challenges, but it requires careful consideration of eligibility, costs, and long-term implications. It's essential to approach DMPs with a comprehensive understanding of the process and seek advice from trusted sources.
