Before you make a decision about whether or not to start a DMP you may want to consider some of the advantages and disadvantages of the solution. Some of these are highlighted below.
As you go through these you should remember to consider them in the context of your own situation as they may not all be relevant to you. More often than not an advantage or disadvantage which is important to one person may actually be unimportant or irrelevant for another.
As such the objective here is not to try and portray a DMP (Debt Management Plan) as a better or worse solution that any other because ultimately this is not the case. This type of debt solution will be simply more or less suitable for you given the context of your personal financial situation.
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The main advantages of a DMP
1. Swift to implement
You will normally be able to get a DMP up and running very quickly. You can start making reduced payments straight away without waiting for the agreement of your creditors. This will allow you to get back in control of your finances immediately. Your creditors will normally agree to reasonable payments within 2-3 months after they can see that they are being made regularly.
2. Affordable Repayments
Your monthly repayments are reduced to affordable amounts which fit within your disposable income. This means that you no longer have to borrow more money simply to keep your payments going and can stop using your bank overdraft and credit cards to make your debt repayments each month.
A DMP is an extremely flexible debt management solution. If during the plan you need to increase or decrease the amount you pay you can do this at any time (although there may be implications if you reduce your payments). You can also stop paying into the agreement if you decide an alternative solution is better for you.
4. Home equity does not have to be touched
Once you start a DMP you will be under no legal obligation to try and remortgage your property and release equity to help repay your debts.
5. Discreet Procedure
A DMP is not recorded in any formal insolvency register. It is a private agreement between you and your creditors and no-one else will be told that it exists. Therefore this type of plan can be used by professionals, forces personnel and company directors without damaging career prospects.
The main disadvantages of a DMP
1. No debt written off
If you start a DMP your creditors will not automatically agree to write off any of the debt you owe. As such unless you can offer a lump sum to settle your debt early or you change to a different debt solution your DMP will not end until all your debts are repaid in full.
2. No Guarantee that Interest will be frozen
Your creditors are not under any legal obligation to agree to your proposed DMP payments. They cannot refuse to accept the payments you make but they can refuse to suspend interest or late payment charges. This means that you may pay off less each month than is added to your accounts in charges.
3. Significant increase in debt repayment period
Because your monthly payments are reduced and there is a possibility that your creditors will add interest and charges to your accounts it is likely that the time that it will take to repay your debt will be significantly increased if you start a DMP. Overall it could take many years for you to become debt free using this solution.
4. No legal protection from your creditors
A DMP is an informal agreement. This means that the plan does not does not offer you any legal protection from your creditors. They are allowed to take further action against you at any time to try to enforce their debt if they wish even if you are maintaining your agreed monthly payments. Your creditors can therefore decide to take court action against you if they wish including applying for a CCJ (County Court Judgment) against you or an attachment of earnings against your salary. If you are a home owner they are also at liberty to apply for a charging order against your property.
5. Negative effect on your credit rating
Once you start a DMP your credit rating will be negatively affected. Missed and late payments and often default notices will be recorded on your credit file. This will mean that you will find it difficult to get further credit for at least 6 years after you start the plan and possibly beyond that if you have not repaid your debts by that time.
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