When fallen behind with bills hearing the phone ring doesn't exactly create much joy. When a debtor only has a fraction of what is needed, what can be done? Well, a Debt Management Plan (DMP) may provide the answer.
What Is a Debt Management Plan (DMP)?
You agree to pay a debt management company a minimum of £100 per month. They will take their fee which is usually about 10% and the remainder will be paid to your creditors. Unlike an Individual Voluntary Arrangement (IVA), a DMP is only a voluntary agreement and is not binding on your creditors. The terms of the agreement can be changed by your creditors at any time.
Preparation
The first thing you need to do is put together a personal budget statement documenting all your sources of income and where it is going. You should include a full list of all your creditors, their addresses, account numbers and how much you are paying them each month.
This will allow the representative to prioritise your debts as only unsecured debts can be included in your plan. It will also enable them to see how much you can afford to offer your creditors without imposing further hardship on yourself.
What Happens Next?
You will be sent an agreement to sign which allows the debt management company to represent you. This will document all that was discussed over the phone, including a full breakdown of your incomes and outgoings and how much you plan to offer the creditors.
You should return the forms to the debt management company and they will represent you from that point. All your creditors will subsequently be contacted with your offer and it is very likely the creditors will agree, especially if they haven't received anything from you in awhile.
The Advantages
- You will no longer have to deal directly with your creditors as this will be taken care of by the debt management company. You can direct all queries to them which means that you can answer your phone again.
- It may be possible to stop any charges and freeze interest. This can save you literally thousands of pounds, especially on agreements where the APR is very high.
- You no longer have to make payments to multiple creditors. You just make one payment and the rest is taken care of.
- It can cut your monthly outgoings significantly allowing you to concentrate on critical bills, such as your rent or mortgage repayments.
The Disadvantages
- Debt management companies will usually take the first payment as their fee and then take upwards of 10% of all future payments. This means that if you pay £100 in month 2 only £90 will be used to reduce your debts.
- Interest on debts isn't always frozen.
- The repayment period can be very long, especially if you owe a lot of money.
- It is only a voluntary arrangement and is not binding upon either party.
- You normally need a minimum of 3 creditors.
A DMP is an excellent solution for those with debts under £15,000 as it will make your life vastly less complicated and mean that you no longer have to deal directly with your creditors. Those who have larger debts should consider an Individual Voluntary Arrangement or personal bankruptcy.
