A Debt Management Plan is an agreement with your unsecured creditors to reduce the amount you pay them each month to fit within a budget you can afford. Creditors will agree to the reduced payments if they can see you you are making your best effort to repay as much as you can each month. Because the Plan is not legally binding it is very flexible. As such most people with unsecured debt problems can use this debt solution. However it is not suitable for everyone. We consider when using one is a good idea and when it is the wrong debt solution.

Using a debt management plan normally takes a long time

The first thing to consider if you are looking at a DMP is how long it will take you to repay your debt. It is important to remember that your creditors only agree to reducing the payments they receive from you. They do not agree to write any of your debt off. As such if you use this debt solution the time it takes you to repay your debt will be significantly extended.

To calculate the new repayment period in months, take the total of your unsecured debt included in the debt management plan and divide it by the monthly payment you are going to make. Then divide this figure by 12 to understand the figure in years.

If you feel that this period of time is reasonable then a DMP may be for you. However, you must remember that your creditors may add additional interest and charges to your account throughout the life of your plan so the repayment period could well be extended.

A debt management plan provides a breathing space

If you calculate how long it will take to repay your debt and you are looking at a period of more than 60 months, then you may think twice before proceeding with a debt management plan. However, it could still be sensible to proceed if you only need a temporary breathing space from your creditors.

If you know that your financial situation will improve within a reasonable period of time meaning that you will be able to increase your payments to your creditors once again, then a DMP could be the right solution for you.

A debt management plan is flexible

Another reason why you might consider a Debt Management Plan despite the extended payment period is because it is flexible. Given this you can change your monthly payments either up or down relatively easily. In addition, you have the option of leaving a creditor out of the plan (for example if you want to maintain a credit card agreement).

BMD Tip: If you are a home owner there is no requirement to release equity from your property if you use a DMP. However the plan does not give you any legal protection and as such your home may still be at risk of Charging Orders.

There are certainly some circumstances when a debt management plan will be absolutely the right solution to deal with a personal debt problem. However, as with all debt solutions there are advantages and disadvantages to be considered which will be more or less important depending on your personal financial circumstances. Before entering into such a plan, it is therefore vital to get the proper advice from a debt management expert.