A Debt Management Plan (DMP) is an informal agreement with creditors reducing the monthly repayments that they accept so that these fit within an affordable budget. If you have decided decided to use this solution the next question is how do you start a DMP? There are basically three choices. Do it yourself, employ a fee charging company or use a free to consumer DMP provider.

Start a DMP yourself

You can start a DMP yourself if you want. You can work out your income and living expenses budgets and how much you can afford to pay your creditors. You can then make offers of payment to your creditors and negotiate with them yourself. You would then be responsible for maintaining the ongoing payments to each creditor.

A major downside to doing your own DMP is the time it will take and your ability to negotiate with your creditors. Negotiations can often take a significant time and you need a pretty thick skin. The experience may not be pleasant and so many people want to avoid if they can.

Secondly once you start a DMP yourself you remain responsible to maintaining multiple payments to different creditors. This requires careful management and record keeping. Often an inability to manage finances in this way is one of the reasons why people get into debt in the first place. As such many people prefer to hand their affairs to a third party rather than trying to deal with the creditors themselves.

Start a DMP using a free to consumer provider

If you do not want to start a DMP yourself you can use a third party to help you. The first option here is to consider using a free provider. It is important to note that free DMP services are not always provided by charities. There are also commercial companies who provide this service.

A clear advantage of using a free service is that you do not have to pay for it. Given this all the money you pay each month goes towards paying your debt which should then be paid faster. However because the organisation is none fee charging, this does not mean that creditors will be more inclined to deal with them or freeze interest or late payment charges. In fact there are many examples of where people used free organisations only to find that a year later their debt has continued to increase because interest has not been stopped.

BMD Tip: Organisations which provide free DMP services do not run on thin air. They must be funded somehow. In fact they are funded by the creditors themselves. As such you have to question whether they are actually impartial and acting in your best interest or the best interests of your creditors.

Start a DMP by using a fee charging company

The alternative to a charitable organisation is a fee charging debt management company. To undertake a debt management plan on a client’s behalf these companies will normally charge fees. An instruction fee may be charged for completing the initial financial analysis and creditor negotiation. Then an ongoing management charge will be made to cover the cost of managing ongoing monthly payments.

Update: Most commercial debt management companies do not charge an upfront fee. If charged this is taken from the first 6 months of payments you make.

Generally the advantage of using a fee paying company over a charity is quality of service, especially during the creditor negotiation period. Because you are paying for the service the DMP company you are working with wants to do a good job for you so you keep paying. They are therefore likely to work hard to get agreements in place and interest frozen. In addition free organisations are often extremely busy and getting an initial appointment to discuss your financial circumstances may take a number of weeks.

Speak to 2-3 different organisations

Generally, when considering how to implement your debt management plan, the best advice is speak to two or three different operations. Speak to a free organisation and two-three different fee charging companies.

At the end of the day choose the one that makes you feel most comfortable and gives you the highest degree of confidence that they can provide you with a good service.

Remember if you do go down the debt management route and then feel that the company you are working with is not providing a good service, don’t panic. You can change your company at any time or even use the company to do the initial negotiation and then take over the ongoing management of the plan and ongoing monthly payments yourself.