Before starting a Debt Management Plan (DMP) you must make sure that you fully understand how this debt management solution works and how it will affect you.
To help you find out more we have provided answers to some of the most commonly asked questions.
1. What debts can be included in a Debt Management Plan?
A DMP is used to deal with unsecured debts. This includes all your consumer banking debts such as bank loans, overdrafts, credit cards and catalogues. You can even include payday loans.
If you are self employed you may also owe money to some of your suppliers. You can include these debts in your Plan however you must understand that they could then refuse to deal with you in the future or only deal with you on a cash basis.
Debts that cannot be included in the agreement are secured debts such as your mortgage or a car HP agreement. In addition you will not generally be able to include HMRC debts such as tax or VAT arrears. If you have these types of debts you might be better considering an alternative debt management solution such as an IVA.
BMD Tip: Although secured debts cannot be included a DMP can still help if you are struggling to pay your mortgage. By reducing the payments you have to make towards your other debts using this type of solution can free up extra cash to allow you to pay your mortgage on time.
2. Can I change my Debt Management Plan company?
If you are already in a DMP but you are unhappy with the service being provided by your current management company there is nothing to stop you changing to a new one at any time or simply starting to manage the Plan yourself.
It would be very unusual for the company you have been using to ask for any notice that you want to stop using them and you should certainly not have to pay them any further fee. However as a courtesy it is always good to let them know that you plan to start using a different company.
BMD Tip: Generally speaking you will not have to give any notice to your current DMP company if you want to stop using them. You simply stop making your monthly payment.
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3. What happens to my bank account in a Debt Management Plan?
The affect of this type of debt solution on your bank account will very much depend on whether you owe money to your bank or not. If you do not then you should be able to continue to use your bank account. However if you do owe your bank money it is likely that you will need to change your account.
The reason for this is to protect any money you pay into your account against the bank’s right of offset. The right of offset means that if you start a DMP the bank can take money from your account without your authority to pay the other debts (such as a credit card or loan) you owe to them. The only way to stop this happening is to stop using your account with them and start using another one elsewhere.
BMD Tip: Opening a new bank account is relatively easy and should always be done before you start your Plan.
4. How much will a Debt Management Plan cost?
The cost of a DMP will vary depending on the type of service you use. If you wish there is nothing to stop you putting one in place yourself. This will of course cost you nothing but your time.
If you do not want to start the Plan yourself there are one or two organisations who will implement and management it for you for free. Using one of these can be a good idea especially if you are not able to pay very much each month. However the free providers are funded by the creditors themselves and therefore there is always a question who’s interests they are really looking out for – yours or your creditors?
The alternative is to use a fee charging debt management company. A fee charging company will normally charge an initial instruction fee of the first one or two monthly payments that you make. They will then charge a monthly management fee of around 15% of your monthly payment.
BMD Tip: Since this article was written most commercial debt management companies now spread their instruction fee deductions across your first 6 payments allowing money to start being paid back to your creditors immediately.
5. What happens to joint debts in a Debt Management Plan?
If a debt is in joint names then both parties are jointly liable for the repayment of 100 percent of the outstanding balance. This means if one person is unable to pay then the other is still liable to pay the total debt.
As such if you include a joint debt in your Plan the creditor can and probably will still chase the other account holder for payment.
It is therefore important that the other account holder understands they are still liable to pay the debt if you start a DMP. If they cannot afford to maintain the monthly payments on their own then they too may also need to start a debt management solution suitable for them.
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