As Licensed Insolvency Practitioners, we believe that a Debt Management Plan is generally only useful if you are looking for some ‘breathing space’ for a few months.
What is a Debt Management Plan?
A Debt Management Plan (DMP) is one of the range of solutions available to you if you are struggling to pay off your debts.
It is a formalised, but not legally binding, agreement between you and your unsecured creditors (i.e. anyone who has lent you money without obtaining specified assets as collateral against the loan).
DMPs are usually negotiated by a third party – a Debt Management Company (DMC).
What about the Debt Management Companies?
There are a number of concerns about Debt Management Plans and some of the Debt Management Companies.
Our concerns come from our own experiences and from articles other financial experts have written. One such article is from Which (the largest consumer body in the UK) entitled “Debt management companies: why to avoid them”.
This highlights some very important considerations…
- When the Office of Fair Trading (OFT) carried out an investigation into the debt-management market in 2010, it found that of 148 visits to Debt Management Companies, only 12 complied with OFT guidance and the Consumer Credit Act. That is just 8% that complied.
- The OFT concluded that Debt Management Companies “are not offering the solution that is in the best interests of the consumer, but instead that which is most profitable to them”.
- Most DMCs ‘front-load’ their fees. This means they get most of their fees in the first months of the plan. Some impose a minimum up-front fee of hundreds of pounds. In most cases, creditors receive nothing for at least the first two months, pushing the debtor further into arrears.
- Around 80% of people entering into an Individual Voluntary Arrangement (IVA) have already been through at least one other debt solution. Having already received front-loaded fees for a DMP, putting a customer into an IVA could help a Debt Management Company maximise its profits.
- Debt management companies must hold a consumer credit license, issued by the Office of Fair Trading. However, the debt-management market is currently unregulated.
- Many DMCs have gone bust in recent years. In its 2010 review, the OFT found evidence that some were either failing to pass on payments to creditors within 5 working days or not keeping customers’ money in a separate client account. The collapse of the DMC could lead to the consumer’s money being lost.
So, is a Debt Management Plan right for me?
A Debt Management Plan can be good if you need breathing space for just a few months.
However, a DMP is not a long term solution to your debt problems which will bring your debt problems to an end once and for all. This is because:
- Your debts will not be written off
- Your debts will have to be repaid in full
- Your creditors do not have to enter it – so they may still demand immediate repayment
- Your creditors do not have to freeze any interest on the amount you owe
- The Plan could last for the rest of your life
- The Plan could be passed on to your next of kin in the event of your death.
The best solution for you might be an Individual Voluntary Arrangement (IVA) – if you’re a home-owner. Or, if you have no assets, Bankruptcy might be your best option.
The key thing that we believe is that if you are looking to sort out your financial problems once and for all, you really should speak to a regulated, professional expert.
That way you can be sure that you will get the best possible advice for your situation.