Managing Debt Via Debt Management Plans

  • What Are Debt Management Plans?

    A Debt Management Plan (DMP) is an agreement formulated with your creditors, by a debt manager, to repay your debt in monthly instalments. DMPs are designed to help you better afford to repay your debt, by organising your monthly repayments into one single monthly payment, which is more affordable and freezing your interest payments.

    Debt Management Plans take into account your monthly expenses, to make sure that your essential needs like travel, food, household bills, and mortgage payments are taken care of adequately. Any money you have remaining after these expenses can then be used to pay back your creditors. The manager of your DMP will be negotiating with creditors on your behalf, to help you attain a plan that best fits your financial situation, and so that you do not have to contact your creditors yourself.

    A DMP can therefore often result in more affordable monthly payments, which are made to the manager of your DMP, who then divides it between your creditors accordingly. Keep in mind though, that although your payments are more affordable, this can mean that you pay back your debt over a longer period of time, and therefore paying an increased amount overall.

    If you would like help in creating a DMP, please feel free to contact us on 0800 955 5020 to discuss the best solution for you.

    Example Debt Management Plan:

    Debt
    Credit Cards £2000
    Unsecured Loans £5000
    Store Cards £1000
    Overdraft £2000
    Total Debt: £10,000
    Monthly Payment Before DMP: £395
    New Monthly Payment With DMP: £120

    • Debt Management Plan Pros?

        • You make one single monthly payment
          Your monthly repayments are re-structured into a single payment that reflects your individual financial capabilities. This means that you are better able to afford your repayments, keeping your creditors happy, and enabling you to cover your personal living expenses. Because you are making just one monthly payment to your debt manager, instead of many payments to your numerous creditors, this makes things easier for you, and gives you the peace of mind knowing that your repayments are being made on time.
        • Flexible repayments
          Unlike many debt solutions, a Debt Management Plan is not a legal contract. If you circumstances change and you want to try a different solution, you can stop payments at any time and begin making payments through your new solution. This gives you the advantage of being able to using a Debt Management Plan on a temporary basis if you wish, enabling you to better manage your payments until you get back on your feet.
        • Interest payments may be stopped
          The manager of your DMP can contact your creditors in order to negotiate terms for reducing your completely freezing your interest charges. This can make it easier to repay your debt quicker.
        • Confidential Procedure
          If you use a Debt Management Plan your name will not appear on any register, and will not be available to the public. Using a DMP will therefore not affect future career prospects.
        • Help communicating with your creditors
          Your debt manager can help you to negotiate terms with your creditors, and if your creditors are contacting you on how best to handle the situation.
        • Your home will not be at risk
          Unlike with other debt solutions, your home will not be at risk with a DMP. Debt Management Plans are for unsecured debts only, no home equity will be taken as repayment. A DMP can help to dissuade creditors from taking a charging order against you.
        • It does not matter if you are a homeowner or a tenant
          You can apply for a DMP while being a homeowner, renting, or living with your parents. As your home equity will never be used for your debt repayments, your living situation is not an issue.
    • Debt Management Plan Cons?

        • Only unsecured debts are covered
          A Debt Management Plan can only cover your unsecured debts. This means the debts which are not backed by any of your assets. If you have any secured debts which are collateralised by assets such as your home, or your car, you will need a separate debt solution to help you with the repayment of these debts.
        • There is no guarantee that your interest can be frozen
          Although your debt manager will try to negotiate with your creditors in order to freeze your interest payments, as creditors are not legally obligated to void late payments or interest charges, nothing can be guaranteed.
        • You will not have any legal protection from creditors
          Your debt manager will try to help you manage your relationship and communication with your creditors, but as a DMP is an informal agreement, your creditors can still contact you if they wish, and pursue further action against you.
        • There can be an increase in the repayment period
          If your monthly repayments are reduced, this can mean that although you are paying less each month, as a result of this, you continue to make repayments for a longer period of time. This can mean that you end up paying more overall, as a result of having more affordable monthly payments.
        • Detrimental effect to your credit score
          Although you are repaying your debt, because you are making reduced payments, and seeking the help of a debt manager, future creditors may see this as an indication of your unreliability and be cautious of lending to you. Any default notices you have against you will be recorded onto your credit report, and this can make it difficult for you to borrow for up to six years or more.

    What criteria do I have to meet to qualify for a Debt Management Plan?

    • 2000
      Amount of Debt
    • 80
      Spare Monthly Income
    • 3+
      Creditors

    BudgetIVA criteria

    It’s important to look at your current financial situation to work out exactly how much money you have left over each month after paying for all of your monthly essentials, and to see if this likely going to be enough to cover your new single monthly payment.

    You can work out your budget by following these steps:

    1. List all of the money which you have incoming, from your work, any benefits you may have, rent from tenants etc.
    2. List all of your expenses, for example, your rent, mortgage payments, household bills etc.
    3. Subtract your total expenses from your total income. Whatever remains is the amount you have available to use to repay your debts. You need a surplus of around £80 – £100 each month in order to qualify for a DMP. If you are a left a deficit (your expenses are greater than your income) then you will not be able to qualify for a DMP.

    Example budget calculation:

    Income Expenses
    Working Tax Credit £150 Maintenance £20
    Housing Benefit £100 Mortgage £600
    Child Tax Credit £550 Gas £80
    Monthly Salary £1,100 Water Bill £30
    Income Support £200 Electricity £60
    TV Licence £10
    Food £800
    Travel £200
    Total Income: £2,100 Total Expenses: £1,800
    Left over cash to repay debt = £300

    Amount of debt

    Generally speaking, in order to qualify for a Debt Management Plan you will need to have a minimum of £2000 in unsecured debts.

    Employment status

    You do not have to be in employment for you to be eligible for a Debt Management Plan, unlike with many other debt solutions available. As long as you have the necessary income each month to meet your single monthly payment, then you can qualify for a DMP.

    Country of residence

    Debt Management Plans are available in England, Scotland, Wales and Northern Ireland.

    Which debts can be included within a Debt Management Plan?

    Debt Management Plans are designed to only deal with unsecured debts (also known as non-priority debts) like credit card debts, unsecured loans, overdrafts etc. Secured debts, which cannot be included within a debt management plan, include rent and mortgage payments, electricity bills, magistrate’s fines, and council tax. If you have secured debts then these will have to be dealt with using a separate debt solution.

    It can be important to know which debts are covered under a DMP and which debts not.

    Which debts can be included within a Debt Management Plan?

    • Payday loans
    • Store Cards
    • Credit Cards
    • Bank Overdrafts
    • Personal debts which are owed to businesses
    • Personal unsecured loans
    • Catalogues
    • Previous TV, water, gas and electricity suppliers

    So which debts cannot be included within a Debt Management Plan?

    • Court fines
    • Child maintenance
    • Council Tax
    • Mortgages
    • Debts from current service providers of TV, mobile, gas, electricity etc
    • Rent
    • Student loans
    • Overpayment of benefits
    • Hire Purchase agreements
    • Secured loans
    • Court fines

    Can I use a DMP if I have a County Court Judgement (CCJ) issued against me?
    You can still qualify for a DMP if you have a CCJ against you, and you can use your DMP in order to repay any debts which are associated with that CCJ. Be sure to make your debt manager aware of any CCJ’s which you have against you.
    Will I be credit checked before I am accepted for a DMP?
    Since you are not being lent any money, a credit check will not be required.

    Will my creditors accept my Debt Management Plan?

    How will my creditors feel about my decision to get a DMP?

    A Debt Management Plan is designed to better enable you to repay your debt and therefore should benefit both you and your creditors. The increased likelihood of you being able to repay your debt should be an attractive prospect.

    My creditors have said they will not communicate with a debt manager, and are threatening court action if I use a DMP

    Your creditor’s acceptance of your decision to implement a Debt Management Plan is not necessary. You have a legal right and are entitled to use the services of a debt management company. Some lenders prefer not to deal with debt managers as this hinders their ability to apply pressure on you, and therefore will make threats in order to dissuade you. Lenders cannot refuse to take payment on your behalf from a debt manager and then attempt to take you to court for failing to make payment.

    Will my creditors accept the offer of a reduced payment?

    Your creditors are not obligated to accept an offer of repayment which is below the contractual minimum, but often creditors will accept such an offer once they see that it gives you a better chance of being able to meet your monthly repayments and therefore improves their chances of receiving repayment.

    Insolvency practitioner

    Will my creditors agree to stop charging me interest?

    It cannot be guaranteed that your creditors will stop interest charges on the money you owe them. Often though, creditors will acknowledge your willingness to repay your debt through a DMP and will freeze the interest on your debt.

    Will my creditors still contact me while I am on a Debt Management Plan?

    It cannot be guaranteed that your creditors will not contact you at all during the time that you are implementing a Debt Management Plan. Your debt manager however will take over the communications with your creditors and negotiate on your behalf. If your creditors send you letters asking for payment, you can forward these to your debt manager to be handled. If you receive phone calls from your creditors, politely explain that you are now using the services of a debt manager who is the person they should contact in the future.

    Can my creditors issue default notices or County Court Judgement against me while I am on a DMP?

    As a DMP is not a legally binding agreement, your creditors can still continue to issue CCJs against you. However your creditors are unlikely to do this, as the amount you are required to pay as detailed by the CCJ is likely to be the same or similar to the amount you already paying as part of your DMP. Default notices can be issued and will go down on your credit history for a period of six years.

    What are the fees, and monthly payments with a Debt Management Plan?

    How is a DMP paid for?

    IVA FeesThe cost of setting up a DMP is equal to the cost of your first two monthly payments. Set up include provision of a financial wealth check, assessment of your financial situation, gathering information from creditors, and handling of the communications between you and your creditors. After set up, 17.62% of each monthly payment (a minimum of £30) is attributed towards the costs of running the DMP.

    How high will my monthly payments be on a DMP?

    The amount which you repay to your creditors each month is dependent on your individual financial situation, your essential expenses, your income, and the negotiations with your creditors. Your debt manager will endeavour to formulate a monthly payment plan that is most affordable for you.

    If my financial situation changes, can I lower or increase my payments?

    Because a DMP is an informal agreement, you can alter your payment structure at any time to suit your financial situation. As long as you are able to meet the minimum payment (usually £80) then your DMP will continue even as your income changes. If you attain additional income, you are not legally obligated to increase your monthly repayments.

    Debt Management Plans have a flexible payment plan.

    What happens when if I want to stop making payments and cancel my DMP?

    Debt Management Plans are not legally binding, and therefore you can cancel at any time without discourse. You will not be charged a cancellation fee, and any funds which have not been paid out to your creditors will be returned to you, however, 28 days notice is required.

    What is the DMP process?

    Step 1: Contact us to speak to a debt manager

    We will assign you a debt manager who will discuss with you your financial situation, your essential expenses, your income and your amount of debt. Your debt manager will explain the process to you and make sure that you understand all of the implications of a DMP.

    Step 2: Negotiating with your lenders

    Your debt manager will contact your lenders and discuss the prospect of lower repayments. Using the information provided about your income and overall financial capabilities, your debt manager will negotiate for a monthly repayment amount which is most affordable for you.

    Step 3: Begin making payments

    You begin making one single monthly payment to your debt manager, who will then distribute the necessary payments to all of your creditors. During this period you will not need to contact your creditors, you contact your debt manager who will speak to your creditors on your behalf.

    How long will it take to set up my Debt Management Plan?

    Debt Management Plans generally take between 4 and 8 weeks to arrange. The time for set up varies depending on the amount of debt, the number of creditors you have, and how long negotiations with them go on for.

    How long will my Debt Management Plan last for?

    This will depend on numerous factors, like the amount of debt you owe and the amount of disposable income you have available to make repayments each month, the amount your repayments have been reduced to, and whether or not your creditors have agreed to freeze the interest on your debt. For example, if your total unsecured debt was £10,000 and your disposable income allowed you to make payments of £200 per month, then your DMP would last for 50 months (roughly 4 years). Remember that you can cancel your DMP and move to a separate debt solution if necessary at any time.

    Is a Debt Management Plan right for me?

    Is a debt management plan the right solution for me?

    If you have disposable income available each month after paying all of your essential expenses like travel, food costs, bills and mortgage payments, but just not enough in order to pay back your creditors then you are likely a good candidate for a DMP. A debt management plan can be devised around the amount of disposable income you have left over and negotiated with your creditors so that you can then make smaller more affordable monthly payments.

    If however, you are experiencing difficulty in paying your essential expenses every month and are completely unable to pay back any of your creditors then a DMP is certainly not the best solution for you. In this case we would be happy to advise you on the most advantageous solution for your individual situation – contact us on 0800 955 5020.