A debt management plan (DMP) is an agreement between a debtor (the borrower) and creditors (lenders) when the debtor is unable to keep up with their contractual payments due to financial difficulties.

DMPs are different to other debt solutions like Individual Voluntary Arrangements (IVAs), where typically some of the debt is written off. With a DMP, a structured arrangement is put in place to pay off all unsecured debts. This arrangement runs over a longer term than the original contract with a monthly payment the debtor can realistically afford. The payment is then distributed to creditors on a pro rata basis.

Debt Management Plan

Benefits of Debt Management Plans

The major benefit of a DMP is the affordable repayments – they are designed to fit inside your disposable income so that you are no longer caught in the vicious circle of having to borrow money to simply keep up with all of your repayments. No more using credit cards or overdrafts to manage your debt repayments each month. DMPs are also usually quick to set up, so you can start making your reduced payments straight away. Another benefit of DMP is flexibility – you can increase or decrease your payments at any point during the arrangement if you need to (although there may be implications if you need to decrease the payments).  The DMP can also be ended early if you find a more suitable solution to clearing your debt.

The Drawbacks

However, there are also some drawbacks to a DMP. The obvious one is the significant increase in the debt repayment period. It could possibly take many years to become debt free by using a DMP – because the monthly repayments are greatly reduced, there’s a possibility your creditors will add charges and interest to your accounts. This means the time it will take to repay your debt in full will be significantly increased with a DMP.

Because a DMP in an informal agreement, there is no legal protection from your creditors. Even if you keep up with all repayments each month, there is nothing stopping them from taking further action against you at any time to enforce their debt. They could still apply for a County Court Judgement (CCJ) against you or an attachment of earnings against your salary. They are also able to apply for a charging order against your property if you are a homeowner.

Your Credit History

If you start a DMP, you must be prepared to accept that your credit rating will take a hit. Late payments, missed payments and default notices will be recorded on your credit file. You will find it harder to get any further credit for at least six years after the DMP starts, or possibly longer, if your debts aren’t repaid by then.

As long as you consider all the pros and cons, a DMP can be an effective solution to helping you out of a desperate financial situation. However, if you find yourself struggling to stick to the repayments, other options may be more suitable, such as bankruptcy or an IVA.

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