A Debt Management Plan (DMP) is often seen as a risk free way of solving a debt problem. This is largely due to the informal nature of the solution. Home owners especially are drawn towards it as they feel it will pose no risk to their home.

Of course this type of agreement may be the best option for you and it certainly has its place in helping resolve debt issues. However it is not without risks and problems.

Given this before deciding if a DMP is the best debt solution for your circumstances you should consider the downsides as well as the benefits. We will uncover some of the problems by taking a look at the top 5 myths regarding this debt solution.

Myth #1 – In a DMP you know how long it will take to repay your debt

Generally speaking a DMP will last for a long time. However the problem is you can never be sure how long this will be. You can try to estimate the length of your Plan by dividing your total debt by the monthly payments you will make.

The problem is that this figure can never be relied upon because you have no way of knowing how much additional interest and charges will be added while it is in place.

Even if some or all of your creditors freeze their interest charges you cannot count on this remaining the case for the entire length of your Plan. Your creditors can change their mind at any time.

Myth #2 – A DMP will help protect your credit rating

As a DMP is an informal agreement many people think that it will not affect their credit rating as much other debt solutions but this is not the case. In fact using this type of solution can often affect your credit rating for longer than if you had started an Individual Voluntary Arrangement (IVA) or even gone Bankrupt.

Why? Well firstly because although the Plan will not be registered on the insolvency register it is likely that your creditors will issue default notices against you due to the decrease in your payments. Default notices will be recorded on your credit file for 6 years and make your credit rating poor for this length of time.

Secondly your credit rating will not really start to repair until your debt has been paid or settled in full. Unlike Bankruptcy or an IVA where after 6 years you can start to rebuild your rating, a DMP will continue to affect your rating for longer than 6 years if your debts have not been paid in full by that time.

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Myth #3 – A DMP does not have to include all your debts

It is true that you do not have to include all your unsecured debts when you start a DMP. However if you do try to leave debts out and continue to pay these as normal it will cause you considerable problems.

The reason for this is that the creditors that you do include will resent the fact that someone else is getting preferential treatment and being paid off sooner and this could mean that they refuse to accept your proposed payments and they keep adding interest and charges to your balances.

BMD Tip: One way of keeping a debt out out your Plan without rubbing up the other creditors the wrong way is to maintain the payments out of your agreed living expenses budget by making savings from elsewhere within it.

Myth #4 – My home equity will not be at risk if I use a DMP

This is one of the biggest myths about a DMP. It is true that if you are a home owner you will not be forced to release any equity for your creditors. However you are not legally protected from further action against your home.

Any of your creditors are well within their rights to apply for a county court judgement (CCJ) against you even if after they have agreed to your Plan payments. Once this has been granted they can then automatically apply for a charging order against your home. If this happens it will have the affect of securing the debt against your property and this eating into your equity.

BMD Tip: If as a home owner your primary concern is protecting your equity, an Individual Voluntary Arrangement may well be a better solution for you than a DMP.

Myth #5 – If I start a DMP interest will be frozen

There is never any guarantee that your creditors will freeze further interest on your debt if you start a DMP. They are under no legal obligation to do so.

Having said that very often if your payments are reasonable and you make them on time each month most if not all of your creditors will stop adding interest and charges to your balances.

However if you miss any payments while in your Plan it is very likely that your creditors will then start to add interest or late payments charges again even if they had originally agreed to freeze them.