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Debt Management Plans

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What is a Debt Management Plan?

 

Debt management plans are mostly used to reduce debt repayments. Your payment amount is set at a level you can genuinely afford. You make a single monthly payment and the provider pays your creditors for you. They also handle contact with your creditors on your behalf. This service is not a formal insolvency and isn’t recorded on any public register.

 

This debt solution is also known as a “DMP” or “debt management”. It’s an informal and flexible type of debt solution. Your creditors are offered a reduced payment and get asked to stop adding interest. The lenders review your repayment proposals and decide whether to accept them. If your financial situation changes in the future, your monthly payment can also change. You can cancel a DMP at any time without notice or penalty.

 

If you need personal debt management advice, please contact us. Our experienced advisers can guide you to an effective and suitable debt solution.

 

How Does a DMP Work?

 

A debt adviser reviews your income, bills, and other household expenses. They work out how much you can genuinely afford to pay towards your debts. This process is designed to leave you enough money to live reasonably while you repay your debts.

 

The debt adviser uses your financial details to make repayment offers to your creditors. They’re showing your creditors that you’re repaying what you can genuinely afford. The adviser also requests that each lender stops debt collection activity and suspends interest and other charges.

 

Debt management offers no guarantees regarding creditor acceptance or interest being frozen. However, most creditors are very supportive of people who are doing their best to repay their debts. Once a plan is up and running it’s likely that interest will stop, though this may not be immediate. It’s unusual for a lender to begin legal action while they’re receiving a regular payment via a DMP.

 

Advantages of Debt Management

 

• The provider handles contact with your creditors

• You make a single payment into the plan each month

• Allowances are provided to cover your bills and other expenses

• Creditors often stop charging interest

• The payment amount can change if your financial situation changes

• You can cancel the plan without penalty or notice

• There is no public register of DMP users

• Joint plans are available to couples

• Less likely than insolvency to cause employment problems

• A DMP takes no account of the assets you own

 

Disadvantages of Debt Management

 

• Your credit rating is negatively affected

• Creditors aren’t compelled to stop interest and charges

• You have no formal legal protection from creditors

• Your spending will be limited while you’re using a plan

• Debt isn’t written off (it’s usually repaid in full)

• It could take a long time to fully repay your debts

 

Comparison with an IVA

 

Both debt solutions offer benefits and drawbacks, so it can be tricky to assess which option is most suitable for you. Skilled debt advisers can help you to balance these factors and make a sensible informed decision.

 

An IVA will offer you more protection and certainty than debt management. Once an IVA has been accepted, you’re formally protected from legal action and interest. You’ll also benefit from debt getting written off once you complete your IVA. You may be also able to resolve a broader range of debts using an IVA.

 

However, an IVA is a formal personal insolvency process. It’s a legal agreement that you cannot easily exit. You also cannot change provider if you’re unhappy about the service provided. Some people find that their employment prevents them from using an IVA. An IVA also takes account of the assets you own. For example, you may have to attempt to remortgage your home.

 

A debt management plan offers more flexibility. You can end a plan early or switch provider. Your payment can increase or decrease as necessary. There may also be more flexibility with your monthly budget and general expenditure. Very few people find that their employment contract prevents them from using a DMP. This type of debt plan takes no account of the assets you own, such as your house or car.

 

How Long is a DMP?

 

Debt management plans don’t run for a fixed period of time. A plan continues until your debts have been cleared in full. This may not take long if your debts are small and/or you can make a substantial monthly payment. If your debts are large and your monthly payment is modest, a DMP could last for too long to be suitable.

 

Debts Usually Included

 

You’ll generally include all qualifying debts in a DMP. Exceptions may be possible, so get expert advice if you want to continue managing a particular debt directly. Debts that could potentially be included are:

 

• Credit cards

• Current account overdrafts

• Unsecured bank loans

• High-cost loans

• Credit union borrowing

• Guarantor loans

• Payday loans

• Store card accounts

• Catalogue accounts

• Old mortgage shortfall debts

• Unpaid non-utility bills

 

Debts Usually Excluded

 

You wouldn’t usually include the following debts in a DMP. Exceptions exist, but direct repayment arrangements may be more appropriate:

 

• Debts secured on property (like a mortgage or secured loan)

• Rent arrears

• Debts secured on vehicles

• Other hire purchase agreements

• Student loans

• Court fines

• TV licence

• Child support or child maintenance debts

• Social fund loans

• Council tax arrears

• Income tax, national insurance, and other HMRC liabilities

• Tax credits or benefit overpayments

• Utility arrears at your current home

 

About Interest and Charges

 

Lenders have a duty to treat customers fairly if they get into financial difficulty. One way to assist their borrowers is to stop adding interest and charges to a debt. Their regulator identifies this as a potentially appropriate step to take. For this reason, most creditors do agree to suspend interest once a plan begins. A DMP does not formally guarantee that interest will stop. Each lender makes their own decision based upon the evidence of financial difficulty provided to them. If interest continues to be added your debt level could increase.

 

About Creditor Acceptance

 

Accepting a reduced payment is very common when financial difficulty is identified. The DMP provider includes evidence of your financial difficulty when making a repayment offer on your behalf. As with interest and charges, the regulator suggests that accepting a reduced payment may be the appropriate decision to take. Acceptance is not however guaranteed and may not be immediate. For example, some lenders may wait until your account has fallen into arrears and passed to their recovery department.

 

Joint Plans

 

Unlike some other debt solutions, joint debt management plans are available. You can use this debt solution jointly with your partner or spouse. A joint plan will not always be the best way to deal with your debts as a couple. It’s common for partners to each use a different type of debt solution.

 

Switching Debt Management Plans

 

DMP contracts shouldn’t include any penalties or extended notice periods for cancelling. Should you be unhappy with the service you’re receiving, you can switch to another provider. You can also exit a DMP at any time to use a different type of debt solution. This may be useful if your financial situation changes in the future.

 

Your Credit Rating

 

All debt solutions (including debt management) will negatively affect your credit rating. A DMP is likely to be less damaging than using a personal insolvency process. Personal insolvency processes include an IVA, Debt Relief Order, or bankruptcy. They remain on your credit file for six years after they begin. If you enter a very long debt management plan, your credit rating may be affected negatively for an extended period of time.

 

Who Regulates Debt Management Plans?

 

The Financial Conduct Authority regulates debt management plan providers. They also regulate debt advisers. Only FCA regulated debt advisers can provide you with full debt advice about all of your debt solution options.

 

Be aware that many IVA providers are not regulated by the FCA. IVAs can only be set up and managed by IPs (licenced insolvency practitioners) who are regulated separately. Some IP firms also have FCA permissions and can provide you with full debt advice. Non-FCA regulated IPs cannot offer you full debt advice. This creates more risk that you’ll be encouraged to choose an unsuitable debt solution. Some IPs also accept introductions from unregulated “lead generators”. These intermediaries also cannot offer you full debt advice.

 

Payments that you make into a debt management plan are protected. The Financial Services Compensation Scheme (FSCS) should reimburse you if a firm fails while holding your money.

 

Fees

 

Commercial debt management firms charge a fee for managing your plan. The fee should be agreed before your plan begins. It’s collected from your monthly payment, with the remainder of your payment getting paid out to your creditors. You can also access free debt management services. To be connected with free services can contact the Money Advice Service.

 

Public Register

 

There is no public register of debt management plans. This may be helpful for people in certain types of employment and for those with enhanced privacy needs. Bankruptcy, an IVA, or a Debt Relief Order are all listed on public registers that are available online.

 

A Short-Term Solution?

 

A debt management plan could be a good solution if you need short-term relief from your creditors. This may be the case if you’re in the process of selling your home, soon to receive a pension lump sum, or waiting to receive an inheritance. You can exit from a DMP as soon as you’re in a position to deal with your debts again.

 

Excluding a Debt

 

It’s not possible to exclude a debt from a bankruptcy, IVA, or a Debt Relief Order. You’re required to include all of your debts even if that will cause you extra problems. Examples of “difficult debts” can include joint loans and guarantor loans. In both cases, the other person will continue to be liable for the repayments even though you’ve entered a debt solution. Money owed to family or friends can cause similar problems; you’ll get no special allowance to continue repaying them.

 

This scenario may be more flexible with a debt management plan. There’s no absolute requirement to include all debts. An adviser can assess whether creditor support can be achieved for leaving a debt out of your plan. They can also assess whether leaving out a debt is in your best interests. Scenarios like this are complex and can only be considered on a case-by-case basis.

 

Managing Your Own DMP

 

It’s not compulsory to use a company (or charity) to arrange a debt management plan. This is work you could choose to handle yourself. Each creditor is likely to request information about your income, bills, general spending, and assets. They’re assessing your capacity to repay what you owe. Each creditor should also take account of your other debts, so that you can deal with them all at the same time. You’ll need to ensure a regular payment is made, usually by standing order or a direct debit.

 

Alternatives

 

Your range of debt solution options depends on where you live. In England, Wales, and Northern Ireland you can also access an IVA, a Debt Relief Order (DRO), or bankruptcy. If you qualify, a Debt Relief Order could be the cheapest and fastest way to clear your debts. Bankruptcy may also provide a relatively fast and cheap way to resolve a serious debt problem. An IVA may be suitable if you do not qualify for a DRO and bankruptcy would lead to serious negative consequences. For example, an IVA may deal with assets (like your home or car) more flexibly than bankruptcy. An IVA may also create fewer employment concerns than bankruptcy for those working in certain sectors.

 

If you live in Scotland your range of options is different. A protected trust deed is in some ways similar to an IVA. It runs for a minimum term of four years and may deal with assets more flexibly than becoming bankrupt. Scottish bankruptcy is also known as “sequestration”. Like a trust deed, in bankruptcy you may be required to make payment towards your debts for a four year period. However, no payment is required if you cannot reasonably afford it. The Debt Arrangement Scheme (DAS) is a formal type of debt management plan. It provides legal protection from creditors and will stop interest being added to your debts. For most residents of Scotland, DAS is a better option than an informal DMP. For further information about Scottish debt solutions, please visit our partner website Trust-Deed.co.uk.

 

Wherever you live, debt consolidation is another potential debt solution. This could involve increasing your mortgage, or taking out a secured loan, to raise funds. Debt consolidation could help you to avoid the negative consequences of a debt solution, for example damage to your credit rating. It might also reduce your total monthly debt repayment to an affordable sum. However, extra secured borrowing could increase the risk to your home if you get into financial difficulty in the future. Mortgages and secured loans may also be repaid over many years. This could add to the long-term interest cost of your borrowing.

 

Coronavirus Factors

 

An IVA is a debt solution that relies upon making a regular payment. Before going ahead, consider whether your income could be affected as a result of coronavirus. Are you at risk of being furloughed or having your working hours reduced? Would an IVA payment remain affordable if this happened to you?

 

There are other ways to manage your finances during this time of uncertainty. Banks and credit card companies may offer you a temporary payment break. Many homeowners have taken a temporary mortgage payment holiday. Covid-19 has caused much financial disruption, but banks and other lenders are providing unprecedented levels of support.

 

Getting Debt Management Advice

 

If you’re considering a debt management plan, please contact us. We’re authorised and regulated to provide you with full debt advice. Our friendly experienced advisers will help you to select a suitable and effective debt solution.

 

 

Author: Andrew Graveson

Qualified Debt Adviser & IVA-Guide.co.uk Founder

 

Page Last Updated: 15/04/2020

 

 

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