If you use a Debt Management Plan (DMP) the amount you pay to your creditors each month is based on your disposable income. This is your monthly income less your reasonable living expenditures.
It is very important to get your living expenses budget right. If you miss expenditure out of your budget meaning your expenditures are too low then your disposable income will be set too high and you will be at risk of struggling with your Plan payments.
If you use expenditure figures which are too high it is unlikely that creditors will think you are trying your best to pay them as much as possible and they will not agree to your reduced payments and continue to charge interest.
What expenses should you include in your DMP budget?
When making a list of all your monthly living expenses you should start by looking at your bank statement. This will normally list many of your regular expenses such your mortgage or rent payment, council tax and utility bills. The costs of these are generally fixed and can therefore be simply added to your budget.
However many other expenses that you incur each month such as housekeeping, money spent on petrol or meals at work are variable and many not be specifically shown on your statement . You need to remember to list all of these expenses in your budget as well.
You also need to remember to include all the expenses you incur that you do not pay for on a regular monthly basis. For example expenses that you may pay annually such as home or motor vehicle insurance.
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Use monthly figures in your DMP budget
A DMP is normally based on monthly payments to your creditors. As such all the living expenses you include in your budget should be listed on a monthly basis so you can work out your monthly disposable income.
If you spend money on some items on a weekly basis such as food then take the weekly figure and then multiply by 52 weeks and divide by twelve months to get an average monthly expenditure. If you pay for some things annually then divide the yearly cost by 12 to get an average monthly figure.
You should also include a budget for variable expenses such as car repairs. Estimate what it costs you to keep your car on the road each year and then again divide this figure by twelve to get a monthly budget.
Make sure the figures you use are reasonable
Your creditors will only agree to your DMP payment proposals if they feel you are making your best effort to repay them as much as you can each month. As such all of your expenditures should be reasonable and based on amounts that your creditors will accept.
Having said that if the amount you feel you need to spend in a particular area is more than the recommended expenditure guidelines you should include these higher amounts. But be prepared to justify what you are spending and understand that your creditors may refuse to agree your budget.
If your creditors do not agree your expenditure budget and payment offer you have two options. You can either reduce your expenses and pay them more or you can simply ignore the rejection, stick to your budget and pay what you originally offered.
Your creditors may continue to add interest but if you are making payments it is more likely that they will reduce their collection activities against you and you will avoid court action including applications for County Court Judgements.
Include room for savings in your expenses if you can
Building up a savings pot will give you a financial cushion to fall back on if you face unexpected expenses such as the washing machine breaks down. In addition if you are able to save some money, you might be able to settle one or more of your debts early.
You will not be allowed to include a specific savings budget in your expenses. However, you should always think about areas of your agreed expenditures where you might be able to cut back allowing you to save the money that you do not spend.
Of course, the more you can afford to pay back to your creditors each month, the faster your debts will be paid. As such, you may feel that you prefer not to save but instead to put every available penny towards your creditor payment.
At the end of the day, this is always personal choice. However, having some savings to fall back on will help if unexpected costs pop up.
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