The Debt Management Plan (DMP) is the most commonly used debt management solution in the UK. It can offer many advantages if you are trying to solve a personal financial problem.

However before starting a Plan you should consider five very important questions to be sure that it is the right thing for you.

1. How much will I have to pay into my Debt Management Plan?

There is no set amount that you have to pay into your DMP each month. Because the Plan is an informal agreement ultimately you can decide what you will pay.

Having said that usually you will based your monthly payment on your disposable income. This is the amount you have left from your income after all of your priority living expenses have been paid.

Your creditors will want to see that you are making every effort to repay what you owe as fast as possible. If you do not seem to be making your best effort then they may be less inclined to agree to freeze their interest and late payment charges which could add significant extra amounts to your outstanding balances.

2. How long will a DMP last?

Understanding how long your DMP will last is really important when trying to decide whether the solution is the best one for you. The bottom line is that the answer is different for everyone.

Your creditors will require you to repay all of your debt in full and your plan will last for as long this takes. As such the length of your Plan will depend on the amount of debt that you have and how much you can afford to pay each month. The more you pay each month the faster your debt will be repaid and the faster the plan will come to an end.

BMD Tip: To estimate the time your Plan will last you should divide the total amount of debt included in the plan by the amount you are able to pay back each month. Then divide this figure by 12 to get the time in years. But remember that this length could change if interest and charges continue to be added.

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3. How will my credit rating be affected if I do a DMP?

If you start a DMP then by definition you will be paying less towards your debts than you should normally do. This means that even if your creditors agree to your payments they will still register default notices on your credit file which will seriously affect your credit rating.

Because your credit rating will be poor while your Plan is running you will find it difficult to take new credit other than from more expensive lenders such as payday loans companies and door step lenders.

BMD Tip: Once you have paid or settled all your debts in full your Credit Rating will improve.

4. Will interest be frozen if I start a DMP?

If you start a DMP there is no guarantee that your creditors will stop adding interest and charges to your account balances. The certainly do not have to. They will each decide individually whether they will freeze their interest charges or not.

You can improve your chances of interest being frozen by showing your creditors that you are making every effort to repay them as quickly as possible by keeping within the living expenses guidelines and paying all of your disposable income each month.

You must also make sure that you make your payments on time every month. If you are late or irregular with your payments your creditors are unlikely to freeze interest or even start adding it again where it was previously frozen.

5. Will my house be at risk in a DMP?

If you are a home owner a DMP can be useful as it will allow you the flexibility to decide whether or not you want to release equity from your property to repay debt or not. You will not be forced to release any equity from your home if you do not want to.

However it is important to understand that it does not give any legal protection against further creditor action. As such any one of your creditors could apply for a charging order against your property in order to secure their debt.

However if you are making your debt management plan payments in full and on time the risk of getting a charging order should be small.

BMD Tip: Since this article was written the law surrounding when creditors can apply for a charging order against property has changed. It is now more likely that a charging order will be applied for even if you are maintaining your payments into a DMP.