Creditors seem more and more keen for people to use a Debt Management Plan to resolve their debt problems. I have seen evidence of a number of creditors hard selling this solution suggesting that it is the best option for the individual. However whose best interests do the creditors have at heart?

It is true that if you start a DMP your monthly debt payments can be immediately reduced to amounts that you can afford. But when considering the solution it is essential to think about not just the short term gain but the long term affects. The question is whether or not the Plan will ultimately resolve your debt problem or just serve to trap you into never ending debt repayments.

A Debt Management Plan requires 100% of debt to be repaid

The main issue with the DMP solution lies in the fact that you are still obliged to pay back 100% of the debt that you owe. Clearly with reduced monthly payments this means that the time it will take you to repay your debt will be significantly extended.

Scrimping saving and living within a tight budget to repay your debts is not easy. The prospect of having to do this in your DMP for potentially many years does not offer any light at the end of the tunnel.

With human nature being what it is, if we can not see progress we are likely to give up. This is why that majority of DMPs fail after 2 or 3 years.

Why do banks favour Debt Management Plans?

One school of thought is that banks are allowed to treat Debt Management Plans more favourably when considering bad debt provisioning on their balance sheet. They do not have to show theses debts as bed debts and so they can still be regarded as bank assets.

If an individual uses an alternative debt solution such as an Individual Voluntary Arrangement (IVA) the bank then has to write off 100% of the debt involved. Given this there is a clear corporate benefit to be had by encouraging people into a DMP and steering them clear of an IVA.

But surely, what is needed here is a solution which is going to best resolve an individual’s debt problem rather than one which seems to serve the creditors best interest of showing higher profits.