Debt Management Plan

A Debt Management Plan (DMP) is a common solution to financial problems, and they’re offered by a lot of debt charities and organisations. For some people they’re an ideal way to manage problem debts and get back on a stable footing. But they’re not the right solution for everyone.

With any debt solution, it’s important to do some research and also get expert advice before committing to a payment plan which might take years to complete. And to understand what it means for you if you plan on taking out more credit, applying for a mortgage, or your situation changes.

If you need some time and space to decide on a solution, it’s important to contact your creditors and let them know. Use our simple and easy DebtBuffer letter templates to update anyone chasing you for payments, and to also let them know if you’re potentially classed as vulnerable. In both cases, it should give you more room to find the right fix for your problem debts.

What is a Debt Management Plan (DMP)?

A Debt Management Plan, or DMP is a repayment plan which allows you to pay off your debts at an affordable rate. The monthly amount is based on your household budget, so you can reduce the stress and worry of struggling to meet multiple demands for payment.

Offered by a range of companies, you can set up a DMP for free by using a debt charity or organisation. And it will last until your debts are cleared, but to help you, many creditors will agree to reduce or stop interest and charges on your accounts.

You can include unsecured non-priority debts in a DMP, but your budgeting process should ensure priority debts are accounted for before your DMP payments are calculated.

A DMP is a voluntary agreement with creditors, so it doesn’t stop them taking further action against you if they wish. And you’re also not tied into a single DMP provider, so you can switch if you want or need to.

Debt Management Plans are available across England and Wales. In Scotland there is an alternative called a Debt Arrangement Scheme which lets you apply for a debt payment programme (DPP). This is more similar to an IVA in practice.

Debt Management Plans are offered by a range of providers, including charities and private companies.

How does a Debt Management Plan work?

The first step towards a DMP is to go through your debts and monthly budget to see if it’s a suitable solution. You can do this yourself, using online debt advice tools, or by speaking to an expert advisor.

You can go through this process for free by contacting a debt charity, and the goal should be to make sure you can cover your living expenses without worrying. If you have remaining cash left after your priority bills are paid, then a DMP may be a suitable solution for you.

At this point you can choose your DMP provider and let them know you’re happy to go ahead. You may be asked to provide proof of elements of your budget, for instance, your average wages if you’re self-employed or freelancing.

The DMP provider will contact your creditors to explain the situation, and the amount you’ll be repaying them. If they agree, you should find all interest and fees will be waived as well, although it may also mean your accounts are automatically closed as part of the process. If creditors don’t accept your offer, they may pass the debt to a collection agency instead. And you should contact your DMP provider for advice and support.

When the DMP starts, you pay a monthly direct debit to your provider, and they’ll distribute it to your creditors on your behalf. And payments will automatically be adjusted if, for example, one creditor is paid off much more quickly than another.

You can update your details at any time if your situation changes, but you’ll also be asked for an annual budget review to check if your financial status and payments are still correct.

What are the benefits of a DMP?

The biggest benefit of a DMP is that it’s one option for removing your problem debts and regaining financial security. But it offers bigger advantages if you tend to have some money left each month after you’ve paid your main priority bills, but just not quite enough to cover rising debt costs.

The main benefits of a DMP include:

  • One simple monthly repayment.
  • Your DMP provider will handle most contact with your creditors, so you will probably just receive statements from your creditors in future.
  • A DMP will be more flexible than most other solutions, so you can easily adapt it if your situation changes.
  • You’re not tied in to a single provider, a fixed period, or by a legal agreement. So, you can leave it at any time if you wish.
  • A DMP is not specifically recorded on your credit history, and you can start improving your score while the DMP is still in place
  • Although it’s not recommended to take out further credit, and could breach your current DMP, if you need to cover a large unexpected expense, you can speak to your DMP provider to find a solution.
  • It’s possible to take occasional payment holidays, usually limited to once per year, if your DMP payment can’t be made for a one-off reason.
  • There are no restrictions on who can apply for a DMP, but there can be for other debt solutions.

What are the disadvantages of a debt management plan?

A DMP isn’t the right solution for everyone, especially if you’re struggling to meet even your basic living expenses. It’s always best to look at every option available, ideally with a specialist debt advisor, to ensure you’re choosing a debt solution which is right for your individual circumstances.

Disadvantages of a debt management plan include:

  • You can’t include priority debts as part of the DMP repayments.
  • Creditors need to agree to your reduced repayments, and can still contact you, or add interest and charges.
  • Because it’s not legally binding, your creditors can still bring further measures against you, including court action. And your assets are not automatically protected.
  • Although your DMP won’t be recorded on your credit record, any payments which default (because you’re paying a reduced amount instead) will hurt your credit score.
  • Because you’re making smaller payments, your debts may take longer to clear. On average DMPs tend to last longer than other debt solutions.
  • A DMP doesn’t have any option for any debts to be written off, so you’ll be paying back the full amounts.

The main thing to remember about a Debt Management Plan is that it’s essentially a voluntary agreement between you and your creditors, handled by your DMP provider. That can be a blessing if you want to avoid more formal legal restrictions, tighter controls on your budget and your creditors are happy to go along with it. But it can be a problem if your debt is sold on to a less sympathetic collection agency, or your existing creditors lose patience.

What’s better? An IVA or a DMP?

There’s no way to say whether a Debt Management Plan is better than an Individual Voluntary Arrangement (IVA), as they are two different approaches to tackling your debts. Picking a DMP or an IVA will come down to your individual circumstances and objectives.

To be eligible for an IVA, you will need to have at least £6,000 in unsecured debt. You’ll need to arrange it through a licensed Insolvency Practitioner, and when it’s in place, it’s legally binding. This means that once your creditors have agreed, they will be governed by the rules of the IVA.

IVA rules mean that your creditors can’t take legal action against you, claim any assets, or contact you directly. All fees and interest are frozen for the length of the arrangement, and at the end of the period (usually five years plus an additional year if you are not a homeowner able to release equity), any remaining money is written off. But you will have strict restrictions on your spending and on taking out any further credit. It will stay on your credit file for six years, lower your credit score, and also go onto the public Individual Insolvency Register. For more information, you should read our dedicated guide to IVAs.

A DMP can be used by anyone, especially if your debt is relatively small and you’re confident about being able to affordably repay it with smaller monthly amounts. It may take longer than an IVA, and rely on your creditors to agree to freeze interest and charges, but you’ll have more control over your budget and finances. Although there is no legal restriction on creditors communicating with you or taking further legal action, it’s relatively unlikely as they’ll prefer to recoup the debt in full by your regular repayments.

The only way to decide whether an IVA or DMP is better for you is to go through your debts and budget to see what fits your individual circumstances, and get advice from a specialist debt adviser.

Do Debt Management Plans hurt your credit?

Entering into a Debt Management Plan itself will not be recorded on your credit history, and won’t impact your credit file, although creditors may add a marker showing your payments are being made through a DMP.

But the fact that you are making reduced payments will almost always have an effect. You are likely to find creditors will automatically issue you with default notices, as you’re not making the full payments you initially agreed.

Experian is one of the three main UK credit reference agencies. They use a scale of 0-999, and a late or missed payment will cost you 130 points. If you’re issued with a default due to entering into a DMP, then it will take 350 off your score. If you then chose to enter into an IVA rather than a DMP, that comes with a further 250 points drop.

Scores and the impact of each penalty will vary depending on your individual circumstances, and as negative entries age, their impact on your score can reduce over time. So, a default from five years ago will be less of a problem than if you had one issued two months ago. Details of court action, defaults or missed payments are automatically removed six years from the date they occurred, even if the debt hasn’t been fully repaid.

Can creditors refuse a debt management plan?

A DMP is a voluntary agreement so you may find that some or all of your creditors refuse your proposed debt management plan. This is likely to be because they don’t feel you’re being fair and paying enough back to them. So, it’s less likely to happen if you have a full income and expenditure budget already prepared to share with them if needed.

The advice from DMP providers is to continue making the proposed payments to your creditors even if they don’t accept your offer. The logic is that it shows willingness to pay back your debts and can help your case in negotiating with them, or in the event of further legal action, as they can’t refuse to accept the reduced amount of money being sent to them.

Obviously if a creditor has refused your proposed DMP, they may still be adding interest and charges to your debt. And they may threaten further legal action, including bankruptcy or a Country Court Judgement (CCJ). If this is the case, you should speak to specialist debt advisers for the best course of action, but you can still use other formal debt solutions, including an IVA, Debt Relief Order or Bankruptcy.

Ultimately the biggest threats creditors will offer are to seize assets, property or force you into bankruptcy. And these will require court judgements which may be more likely to work in your favour if you show you’ve already been making reduced payments to try and tackle your debts.

Will a DMP affect my job?

Most jobs aren’t affected by debt solutions, but the more formal, legal options can impact on your career if you work as a police officer, or in the financial services, for example.

As a less formal solution which doesn’t appear on your credit report or public records (although missed payments and defaults will be), a DMP is much less likely to affect your job. Especially compared to a more serious debt solution, such as bankruptcy.

It will depend on your employer, so you should look at your employment contract and get advice from your Human Resources department or trade union representative to check. For example, different Constabularies across the UK will have their own policies and procedures for what you may need to disclose.

Can you get a mortgage with a DMP?

If you have missed or defaulted on payments either before entering into a Debt Management Plan or since starting a DMP, then this will have impacted your credit history. And this will make it harder to get a mortgage (or remortgage), as you’ll be seen as more of a risk.

Getting a mortgage isn’t impossible with a DMP, but you’ll be offered less attractive deals with higher interest rates.

Typically, most DMP providers will want you to avoid taking on further debts and credit. However, mortgages are slightly different as they can often save you money compared to the cost of living in a private rented property.

Landlords and letting agents generally rely on public information, and have to ask to see more detailed credit reference agency details. If you’re already renting, entering into a DMP is unlikely to change anything. And if you want to rent a new home, then if the landlord or letting agency is hesitant, you could offer a higher deposit, supply additional references, or add a guarantor.

Can you take out car finance, buy a new car or lease on a DMP?

The rules of your Debt Management Plan will be set by your DMP provider. Generally, it’s not against any guidelines to buy a car, but you won’t be allowed to take out any additional credit without speaking to your DMP provider first.

So, if you’re buying a car outright, there’s no issue under a DMP. Obviously, it’s important to make sure it won’t make a mess of your budget. And if you are paying a reduced amount to creditors and then buy a new Porsche, that may raise some issues if your DMP provider or creditors find out about it.

If you need to buy or replace your car using finance, then it’s possible your DMP provider will allow it. Especially if your circumstances make it more of a necessity for commuting to work, looking after children or caring for sick and elderly relatives. Or if you have health problems yourself. In these cases, you must talk to your DMP provider before taking out any credit, or the agreement could be considered breached and end immediately.

Hiring a car for an occasional need isn’t a problem during a DMP. You may need to discuss with your provider if you want to enter a long-term lease agreement. Or if you’re eligible through the Motability Scheme.

As with any other credit, you’re likely to find missed payments and defaults recorded on your history will make it harder to get a good deal on car finance. So, you might end up paying a higher rate of interest than you expected. But it’s certainly possible to take out new car finance whilst on a DMP.

If you’re struggling to meet car hire purchase or PCP agreements, it’s worth remembering that you can end both early, as they’re covered under Section 99 of the Consumer Credit Act 1974. You can hand your car back without penalty as long as you’ve repaid 50% of the total finance amount, and there is no damage other than normal wear and tear. Or by paying the balance to bring the amount paid up to 50%.

A Debt Management Plan has no rules regarding whether you can keep your current car or other motor vehicles.

Can you get a loan on a DMP?

There’s no law stopping you from taking out a loan or other credit during a DMP. However, you may find your DMP provider restricts it in your agreement with them, and creditors might decide to stop your plan if you’re adding more debts whilst paying them a reduced amount.

You’ll tend to find that charity DMP providers are more likely to require you not to take on loans or credit. But even if your agreement allows it, lenders will see any missed or defaulted payments on your credit score. They might refuse your application, or charge you much higher fees and interest rates.

It’s best to check with your DMP provider as soon as you encounter an unexpected cost, or believe you might need additional credit. They may let you take a payment holiday or organise further reduced payments while you deal with the situation, or suggest you change to a different debt solution.

Debt Management Plans and Maternity

Becoming pregnant can be planned or unexpected. But either way it’s likely to impact on your household budget. If you’re trying for a child, then it’s worth mentioning this to a debt advisor when you’re looking to set up a solution as this can be factored into their recommendations.

If you’re already on a Debt Management Plan then you should speak to your provider as soon as possible. Pregnancy may mean that you’ll be unable to make your current payments in the future, so your DMP provider can either speak to creditors to negotiate a payment holiday, or a new payment amount.

And if your DMP no longer makes sense due to the new family member, then you may be better switching to an alternative, such as an IVA or if you have no real way to continue meeting agreed payments, contact a debt charity regarding Bankruptcy or a Debt Relief Order and find out what your options are going to be.

The most important thing is to speak to your DMP provider and debt advisors honestly and as early as possible. The sooner you can get arrangements sorted to cope with your pregnancy, the quicker you can focus on enjoying it.

What happens when you cancel or finish a Debt Management Plan?

As an informal agreement, you can cancel a DMP at any point. If your provider charges any fees for their services, then you may need to pay a cancellation fee. If you’ve used a free DMP service through a debt charity, then there will be nothing to pay.

If you still owe on your debts, then you should look to switch DMP providers, or to another debt solution, before you arrange to cancel your existing DMP. When you have informed your provider that you wish to cancel, they will tell your creditors, who may start charging you interest and late payment fees again, along with expecting the original payment amounts. So, unless you’re paying off the full amount straight away, it’s best to get your alternative solution organised first.

When you cancel, you should check that you stop any direct debit to your DMP provider, and set up any required payments to your creditors. You’ll also have to deal with them directly once again.

It’s possible to pay off your DMP earlier by increasing your monthly payments, or using a lump sum to pay your creditors in full or with a partial settlement offer.

Whether you’ve finished your DMP early, or completed the full term of the agreement, the first thing is to congratulate yourself for clearing your debts.

While you’re enjoying the feeling of becoming free of problem debts, you should also make sure that you have stopped any direct debits, and confirmed that your DMP and financial obligations have been cleared in full with your provider and creditors. You should receive confirmation by post that the amounts have been settled.

Your credit history should also be updated within 2-3 months to show that the accounts in debt have been fully settled as a closed account can remain on your history for up to 10 years. Late payments will also be disappearing over the period of your DMP as these are automatically removed after 6 years. So, you should be left with a much better credit score as your situation improves.

Is a DMP right for you? Taking the next steps

If your debts are under £6,000, and you have a reasonable amount left each month after paying your priority bills and living costs, then a Debt Management Plan may well be the best solution for you.

But it’s important to look at all your options and get professional advice before committing to a specific debt repayment. Especially as a DMP can last up to 10 years, although this will depend on the amount owed, and what you can affordably repay.

Your first step should be to contact your creditors to let them know you’re putting a solution in place to repay your debts. And this doesn’t have to be stressful or time consuming, as we’ve put together some DebtBuffer letter templates to help you.

And as an informal and flexible solution, if you find that your DMP isn’t working to solve your current situation, it’s easy to change or cancel for an alternative. But importantly, you’ll have shown a willingness to tackle your problem debts, which helps any future conversations with creditors, or in the event of any further action by them.