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Living on a debt solution

Can I take a payment holiday during my debt management plan?

Posted 28 February 2016 by Christine Walsh

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Learn what a payment holiday is in our helpful blog.

 

If you think that starting a Debt Management Plan could be the right solution to resolve your unmanageable debts, you might be wondering whether it’s ever possible to vary what you pay. Whatever solution you go for, it’s always best to do your research and look into what would happen if your circumstances changed in any way. So let’s have a look at what a Debt Management Plan is exactly, and what would happen if you needed to take a payment holiday or change the amount that you put towards your debts on the plan.

What is a Debt Management Plan?

A Debt Management Plan (DMP) is a plan of action to deal with your unmanageable, unsecured debts. It’s an informal arrangement, which means it’s not legally binding, and your creditors don’t have to agree to the terms. Often creditors agree to freezing interest and charges as well, if they can see that it would help you repay the debt.

 

With a DMP you would pay your creditors an amount that was less than the repayment amount you agreed to when you first took the line of credit out. You’d continue to pay this until the whole of the debt was paid off. DMPs can be arranged directly between yourself and the creditors, or you can choose to use a company who will manage the whole process for you, sometimes a fee will be payable. 

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 Can I change my payments on a Debt Management Plan?

How long you stay on a DMP simply depends on how long it will take you to pay the debts back that are included on the plan. This can vary greatly from person to person and a DMP would only be recommended to you if you had a reliable source of income and could pay back what you owe in a reasonable amount of time. Whilst you’re on a DMP, we don’t expect your life to stand still and, in the past, we’ve dealt with cases where the payments have had to increase or decrease to reflect a change in circumstances.

With a DMP payments are expected to be a certain amount and if there is a change in circumstances you can call your DMP provider and your income and expenditure will be reviewed. It’s important that you speak up as soon as you know you might have a problem so you don’t run the risk of falling behind on your DMP payments.  Most of the time however, people need to take payments holidays because of unexpected expenses, like a broken washing machine or a car repair.

It is possible to lower your payments on a DMP or to suspend them if necessary. Of course, the creditors would have to agree to the change for this to go ahead, but there’s nothing legally tying you into paying the same amount every month. If you needed to lower your payments, and you used a DMP provider such as ourselves, we’d take you through your income and expenditure and create a new budget for you. This new budget would reflect the change that has taken place, so that we could demonstrate to your creditors that it was necessary for you to take a payment break. We may require you to send us proof in so that we can forward this to your creditors. If you can afford to catch up with the payments when they resume then we may recommend that you do this, especially if there was any danger that the creditors were going to break their agreement to freeze interest and charges.

You may have priority payments included on your plan – so payments that are more important than others, for instance Charging Orders or CCJs. If you can we would always recommend that you make enough of a payment to cover those bills, or at least a token payment if you couldn’t cover all of it. This is because the consequences of missing these payments are normally worse than missing other and can include further legal action or an Attachment of Earnings Order.

As we said earlier on, you do pay back everything you owe on a DMP, so the time taken for the payment holiday would simply be added on to the end of your plan.

DMPs can be used a temporary measure

So as you can see, there’s quite a lot of flexibility built into a DMP and, as long as your creditors agree, it is possible to change the amount that you pay.

If you know that you’ll only have trouble meeting your payments for a couple of months it may be worth contacting the creditor directly to see whether they can arrange a payment holiday for you. However, DMPS can also be used as a measure to combat a temporary cash-flow problem. So, if your circumstances improved once you were on the plan, it’s possible to increase the amount you’re paying or even to go back to your contractual amount. The advantage to this of course is that you will pay your debts back faster.

A DMP will affect your credit rating

There are many advantages to taking out a DMP if you’re in unmanageable debt, including lowering your monthly payments and possibly freezing all interest and charges. However, a DMP means breaking the contract that you signed when you originally took the credit out and this means that it will have a negative effect on your credit file.

So should you apply for anything that requires a credit check, the company performing the check will be able to see the defaults. If you wanted to apply for credit in the future, this may mean you find it more difficult to do so, or that borrowing becomes more expensive.

It is possible to improve your credit score after a DMP and bring it back to full health, but it’s a process that takes time. For more information on how to do this, have a look at our blog.

Remember, there is always a way to deal with any debt problems you may be experiencing. Our advisors are available to talk you through the details of a DMP or any other debt solution, just use the options to the left to get in contact. 

Paying back smaller chunks of your debt over a longer period fo time may increase the total amount you end up paying back. 

 

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.