Tackling your debts

Can a Debt Management Plan help me get debt free?

Posted 14 August 2016

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What is a Debt Management Plan and will it affect your credit history? Let’s take a look how it all works.

If you’re struggling with your repayments on unsecured debts, you may have considered a Debt Management Plan (DMP). But how do you know if it’s the right debt solution for you? If you’re finding that your monthly repayments are just not affordable, a DMP – in the right circumstances – can help you take control of your debts. 

A DMP can help you get your finances back on track. Instead of juggling a number of payments – you’ll make one affordable monthly payment to be distributed between your creditors. 

Whether or not a DMP is the right choice for you will depend on your own personal circumstances. Like any debt solution, there are advantages and disadvantages to a DMP.

Let’s explore this debt solution in more detail and whether it could be the right way forward for you.

What is a Debt Management Plan?

A Debt Management Plan (DMP) is an informal way of managing and repaying your debts. If you’re struggling to make the repayments for your unsecured debts, a DMP may be the right solution for you. 

This plan is designed to pay back everything you owe, but at a level you can afford. This means you’ll be paying your debts off for longer than you would do if you were making your repayments in full at their original level.

Whether it’s the right solution for you will depend on a number of factors, including how much you have to put towards your debts each month, and how long it will take you to repay your debts on the plan. If you apply for a DMP, a debt advisor will carry out an assessment of your income and expenditure to understand your circumstances and what you can afford to pay back.  

As long as your creditors agree, your repayments will be reduced to this level, so you can pay back what you owe at an affordable rate. This way, you can take control of your debts and be able to pay all your essential bills as well, such as your rent and council tax.  

Is a Debt Management Plan suitable for me? 

Having a Debt Management Plan (DMP) shows your creditors that even though you can’t afford your repayments in full, you’re taking some steps to clear your debts. Because of this, the added interest and charges are likely to be frozen to stop the debt increasing over time. On a DMP, creditors may be less likely to apply for a County Court Judgement (CCJ), as it’s clear that you’re making every effort to pay back what you owe. 

However, these advantages are not guaranteed. Unlike formal debt solutions such as an IVA or bankruptcy, you’re not legally protected from being taken to court. Creditors are under no obligation to freeze the interests or charges, like they are with a legally binding agreements. It will be down to the individual creditors who will base their decisions on your own personal circumstances. 

Struggling with unmanageable debt repayments to a number of different creditors can be a very stressful situation. And it can be even harder to deal with if you’re receiving regular contact from each lender. With a DMP, as long as you stick to your agreed monthly payments, you should receive less contact from your creditors.  If you use a solution provider to manage your DMP for you, they should deal with any contact that you do happen to receive. This can help give you more control of your debts. 

For more information on the advantages and disadvantages of a DMP, be sure to read our previous blog. 

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Will it affect my credit history? 

As your monthly payments are reduced to an affordable rate, it will take you longer to pay back what owe and become debt free. Although the Debt Management Plan (DMP) indicates to creditors that you’re paying back everything you owe, you’re not making your monthly contractual payments in full. This will have an effect on your credit history. 

When you enter a DMP, it’s possible you’ll receive a formal notice from your creditors advising you that your debts have ‘defaulted’. A default is marked on your credit history for at least six years after it was first issued. This shows that you’ve missed a number of payments and that the contractual agreement between you and the creditor has been broken. So, whilst a default is on your credit history, it can mean you find it more difficult to get credit or that you have to borrow with a more expensive rate of interest.

Learn more about how a debt solution will affect your credit history with our previous blog.  

Can we help? 

When you’re struggling with repaying your debts, it’s easy to find the whole situation overwhelming. If you’re losing sleep over your unmanageable debts, it may be a good time to seek advice.

Getting in touch with our advisors can help take that weight off your shoulders. They will look at your personal circumstances, your income and expenditure and recommend a solution suitable for you. By doing this, you can come to an agreement with your creditors that you’re both happy with, whilst working towards becoming debt free. 

You can get in touch with one of our debt experts by using the options to the left hand side of the page. Our advisors are on hand to guide you on your debt-free journey.

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.