Debt Management Plans (DMPs) are becoming more popular with each passing day. In fact, research estimates that more than 2 million people are in one. But are DMPs the most efficient ways of restructuring debt? Not always.
So, when are DMPs suitable? And what are they exactly? Let’s find out.
What is a Debt Management Plan?
In a nutshell, a DMP is an informal agreement between you and your creditors where you pay off your debts through reduced monthly payments. It’s important to point out that DMPs will only cover your non-priority debts. With non-priority debts, the creditor doesn’t have extraordinary legal powers to make you pay your debt – for instance, they can’t seize your property. Non-priority debts include cases like overdrafts, personal loans or credit cards.
This means that you can’t enter a DMP to sort out your priority debts – such as mortgage payments, rent or council tax. With priority debts, lenders and creditors have stronger legal powers to enforce the debt. If you want to avoid legal trouble, you should prioritise these kinds of debts over stuff like a bank overdraft or an unpaid personal loan.
But be careful. That’s not to say that you can ignore your non-priority debts and hope they magically disappear. In fact, a non-priority debt can easily become a priority debt. All it takes is for your debtors to get a county court judgement and start legal procedures against you.
With the average credit card debt per household standing at a record £2,192, it’s no wonder debtors are relying on DMPs more than ever. Effectively an informal rearrangement of debt, DMPs can act as a much-needed lifeline for struggling debtors. But are Debt Management Plans always effective? Not quite, as it turns out…
What are the issues with Debt Management Plans?
For debtors struggling to make ends meet, a Debt Management Plan can breathe new life into their finances. But as useful as DMPs can be, they’re not always the right choice. If you’re struggling to pay your priority debts, you should consider another option that allows you to re-arrange your debts differently. And there are several other factors you should consider before taking on a DMP.
Firstly, DMPs require you to close any credit card that is included in your plan. The main purpose here is to ensure that you don’t take on more debt while repaying your current balance. In fact, it is possible for the creditors in your DMP to monitor your spending. To make things worse, DMPs may have a negative impact on your future credit rating – particularly if you’re struggling to keep up with your monthly payments.
On top of that, not all creditors are happy to participate in a Debt Management Plan. And if they do, you must remember that the terms and conditions are ultimately determined by the creditor. Strike a bad DMP deal and you’re stuck with it until you pay it all off. And that can be a very long time. On average, DMPs tend to last in the region of five to ten years.
That takes us to one of the biggest drawbacks of a DMP. On top of the debt you’re repaying, DMPs usually include an initial set-up fee and a monthly fee. Because DMPs aren’t regulated in any way, the fees will vary between commercial DMP providers. Usually, they’ll be around 20% of your monthly payment. Now multiply that for the 60-120 months that you’re likely to spend repaying your debt. Not great, is it?
Fortunately, taking on a Debt Management Plan isn’t your only way out if you’re in debt.
What are the alternatives to a DMP?
Without a doubt, the biggest negative to DMPs is that they aren’t legally binding. At any point, your creditors can do a 180 and take you to court to reclaim what’s owed. How do you avoid this? By choosing an alternative legally binding debt solution that truly helps you turn a new page.
We have identified three of these…
Individual Voluntary Agreement (IVA)
IVAs are legally binding agreements between you and your creditors that allow you to pay back your debts over a period of time. Unlike a DMP, an IVA must be approved by your creditors and by the court. Once you enter the agreement, your creditors will stop charging interest on your debts and chasing you for payments. IVAs can help you to protect your assets and ensure that you can write off debt with fixed, reliable payments that cannot be modified.
When you enter an IVA, your creditors can no longer take any further legal action against you. This fact alone makes IVAs more attractive than DMPs for many people in debt.
Contrary to popular belief, going bankrupt can be greatly beneficial in the long run. But why? To start with, bankruptcy eliminates uncertainty. Having to deal with multiple creditors over a long period of time can take its toll on even the strongest business owner. But if you enter bankruptcy, an appointed administrator will step up to take care of everything for you. And once the whole process comes to an end, your debts will be written off and your creditors will not be allowed to chase you.
Additionally, your creditors will have no option but to accept less money than what your original debt was. And unlike DMPs, bankruptcy agreements are legally binding. Once your creditors have agreed to a deal, they can’t go back and change the terms of the agreement.
Debt relief order (DRO)
If you can’t afford to pay your debts, a Debt Relief Order can help you move on. If you successfully apply for a DRO, you won’t have to pay certain kinds of debt for a specified period – usually around a year. At the end of this period, any debts that you cannot afford to repay will be written off. To be eligible for a DRO, you must owe £30,000 or less and your assets can’t be worth more than £2,000 in total.
For many people, DROs represent a low-cost alternative to bankruptcy. Even though it’s a legally binding agreement, a DRO involves more affordable fees than DMPs. It also prevents your creditors from taking any further collections activity against you.
Helping you find truly viable alternatives
If you are in a Debt Management Plan (DMP), it might not be the best option for you. An unfavourable DMP can present serious issues, from debts that aren’t written off to creditors who keep putting interest rates up. But don’t worry – Clarke Bell can provide a free review of your plan to deal with your debt problems. In fact, we have plenty of experience helping clients who came out of a DMP to get their debt problems sorted out once and for all.
So, if you’re looking for debt management advice, you know what to do. For a free, no-obligation chat, give us a call on 0161 907 4044 or email [email protected] today.