Should I start a Debt Management Plan?

Should I start a Debt Management Plan?

The Debt Management Plan (DMP) is one of the most commonly used personal debt solutions in the UK. It is popular for its flexibility, but how do you know if it is the right solution for you?

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How a Debt Management Plan works

A DMP is simply an agreement with your creditors to reduce the amount you pay to them each month so that the payments fit within the budget you can afford. Unlike other more formal debt management solutions debt is not automatically written off . You still have to pay back everything you owe.

There is no formal register however it is estimated that over 600,000 people are currently using this type of solution to manage their debts.

One of the main reasons for its popularity is flexibility. A Plan can be started or stopped at any time and can be used for any level of unsecured debt. In addition it can be based on whatever level of monthly payment you can afford.

Just because people like this plan does not make it the right or best solution for them. Part of treating customers fairly is to ensure you understand which solution best fits your circumstances.

Main differences to formal solutions

The DMP does not offer you the same protection as an IVA or Bankruptcy. Creditors do not have to agree to the plan and could still take enforcement action. However in the majority of cases if they have a reasonable offer based on an agreed budget, they do accept it.

Remember no debt is written off with a DMP. So as you are paying less than your normal monthly payments, the time it will take to repay your debts will be significantly extended. Wheras a formal solution like an IVA usually lasts 5 years and a Bankruptcy much less.

In a formal solution interest and charges are frozen. The creditors cannot add charges to your debts. In a DMP the creditors do not have to do this. This is important as if charges continue the debt would take longer to repay or in worst cases the debt would not go down at all!  Though again if you provide a realistic budget and offer proof of your situation creditors usually do freeze all charges.

Your credit rating will be effected by any debt solution. All credit activity is stored on your file for 6 years. If your DMP lasts longer than an IVA would have done, then the credit file is effected for longer.

Worrying about how your credit rating will be affected should not be a high priority when deciding whether or not to start a Debt Management Plan or any other debt solution.

What situations are best suited with a DMP

One of the most common reasons for starting a DMP is when there is a sudden change that may create uncertainty. This can include redundancy, family problems or perhaps health issues. Formal solutions like an IVA need a level of certainty around income and expenses or creditors will not agree to them. A DMP is quick to set up and can manage such problems with a degree of flexibility.

Another reason may involve protecting the equity in a property. Formal solutions will look at the equity in a home. You may be expected to release equity or even sell your home to pay more of the debt back to your creditors. Some people are keen to avoid this especially where there is joint equity involved.

Joint debts and guarantor loans are another reason people may wish to use a DMP. Sometimes it is hard to tell family members about debt. Debtors may be embarassed or not wish to cause stress to family members who are linked to the debts in some way.

Sometimes people simple feel responsible in that they want to pay the total debt back and not ask the creditors to write any off. Perhaps less common, but still sometimes a reason to choose a DMP.

How does a Debt Management Plan effect my home

If you are struggling with debt and you own your home, one of your priorities may be how to protect your property. If you use a DMP you will not be forced to release any equity from your property to repay your debt. For this reason this solution is often favoured by people who’s priority is to protect their home equity.

However it is important to remember that because the Plan is not a legally binding debt management solution your creditors could still chose to take legal action against your house to try and secure their debt against it by applying for a Charging Order against it.

If you have agreed Plan payments with your creditors it is likely that they will suspend this type of legal action. However there is no guarantee of this.

If you have received a CCJ notice from a creditor, this could be a sign that they wish to secure their debt on your home. You should call us ASAP as if this happens you may end up with less options available to you.

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