DEBT MANAGEMENT THE FACTS PART 2
Debt Management Plan
A Debt Management Plan (DMP) is similar to an IVA, it is more informal but it does not usually allow any of your debt to be written off. A DMP is ideal for those with less than £15,000 of debt, or less than 3 creditors. It works by making it much easier to manage your money, as only one weekly or monthly payment is required. This can help you get out of debt by making regular payments which you can afford. In many cases it is possible to freeze the interest on your debt and stop further charges being made. However be aware that this is not always the case and sometimes interest repayments can actually be increased due to the term of the credit agreement being increased.
A DMP is an informal arrangement between you and your creditors, negotiated by your debt management company for you. They take all the details of your debts, income and outgoings, and provide proof to your creditors that you can't afford your current repayments. Your repayment figure is based on disposable income once essential outgoings such as rent and food are budgeted for. They then agree what you can afford to pay your creditors each week or month and agree this reduced payment on your behalf. Often if your circumstances change your repayments can be changed to reflect your new financial situation. You then make one payment to the debt management company who redistributes it to your creditors.
You do not need to be in full time employment nor a home owner to negotiate a DMP, you can also apply if you have existing CCJ's against your name. Your current credit rating is irrelevant when applying for a DMP as it is not credit that you are applying for, nor are you applying for additional funding.
The negative points of a DMP are that the debt will take much longer to pay off as all the debt will need to be paid eventually. Also the overall cost may well be more, although the interest may be frozen, the debt management company that you use will take their fee from your monthly payment before paying your creditors. This fee will be in the region of 15% to 20% of the money you pay each month. Some companies take the whole of the first few payments that you make as their own fee, which means that they are not passing your money onto your creditors straight away. This sometimes results in creditors sending out default notices or worse, threatening legal action.
There is no guarantee that existing or potential proceedings will be suspended or removed. Your creditors are within their rights to continue to issue default notices and add additional costs to your debt. Your credit rating will almost definately be affected, as you will be breaking the terms of your repayment agreement with your creditors.
As with the IVA do take a great deal of care choosing your debt management company. Along with hefty monthly charges and initial set up fees, your chosen company may take a long time to arrange and distribute payments to creditors, as a result your new contractual payments to creditors may be missed. Consider contacting a charity run debt help organisation like CCCS who do not take the large fees from you. However if you do choose a reputable debt management company a DMP can be hugely beneficial for sorting out your debt problems.
