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Can you take extra credit out when you’re on a Debt Management Plan?

Posted 01 September 2016

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What are the rules about borrowing while you’re on a DMP?

In the right circumstances, starting a Debt Management Plan (DMP) means you can start to get back on your feet and in control of your finances. If you’ve been struggling with your debts for a long time, it will probably be a relief to finally have a plan.

But a DMP is also a compromise – you’ll have to stick to a budget and you might even have to cut back on spending in some areas. So if you’re on a DMP and you suddenly have an extra bill to pay you weren’t expecting, can you borrow money to cover it? Let’s go through the rules around extra credit on a DMP.

Are there rules on a Debt Management Plan?

A Debt Management Plan (DMP) is an informal solution, which means that it’s not legally binding. This means it doesn’t have a lot of the rules associated with other more formal ways of clearing your debts, such as bankruptcy or an IVA.

But just because a DMP isn’t a formal, legally binding solution, it doesn’t mean you don’t need to take it seriously. It’s really important that you keep up-to-date with your payments on a DMP and let your creditors or solution provider know if you’re going to have a problem making them. 

As a DMP isn’t legally binding, it also means you’ve got no protection if your creditors decide to take further legal action. Of course, if you set up a DMP through a provider, they’ll speak to your creditors to encourage them not to take any legal action against you. But if you’re not keeping up to date with your DMP payments, they may be more likely to consider legal action to get back the money you owe them.

It’s also important for you that you keep up with your regular DMP payments as by paying into your solution, you’re working towards becoming debt free. 

Extra credit

As we’ve explained, a Debt Management Plan (DMP) doesn’t have any legally binding rules. So does this mean you can borrow more money while you’re on the solution?

Most DMP providers will advise you not to take out any extra credit while you’re already paying off debts on the plan. This is because any extra credit repayments could make it difficult for you to afford your regular DMP payment. Your existing creditors might not be happy with this so they may be more likely to take legal action against you.

What’s more, taking out debt you know you can’t afford to pay back can be seen as fraudulent. It’s unlikely you would be able to add fraudulent debts to your DMP so these would have to be paid back outside of the plan, meaning an extra payment to manage.

It can also mean that you’ll end up starting to struggle with your debts again. Starting a debt solution like a DMP means you’re getting back in control of your finances. You don’t want to put yourself back in a financially weak position by taking on more than you can handle.

Find my solution

You’ll probably find it harder to get accepted for credit while you’re on a DMP or if you’ve recently completed one. This is because when you go on the solution, creditors are likely to default your accounts as you’re no longer making the full monthly repayment you originally agreed to.

Defaults will appear on your credit history for at least six years and when lenders see these on your credit file, they may decide not to lend to you, or to accept you but at a higher interest rate. However, it’s important to note that your creditors can default you at any time and if you don’t do anything about your debt problems, it will get much worse than if you are on a DMP. You can find out more about defaults when you’re on a DMP with our blog.

When you apply for a DMP, your debt advisor will go through your income and expenditure in detail. They’ll look at everything you’ve got coming in including wages and benefits and all of the essential bills and other financial commitments that you’re spending it on. The money that’s leftover will then go into your DMP. 

It’s really important that you set aside enough money for each area when the debt advisor is going through your income and expenditure with you – so don’t say you only spend £10 a month on clothes when it’s nearer £20. This will mean you’ll be short for your expenses every month, which could make you more likely to turn to credit. 

Unexpected bills

Of course, even the best laid plans don’t always work out as you’d hoped. Even if you budget for everything you currently pay for, it’s possible you’ll receive a bill you just weren’t expecting – if your car breaks down and you need it for work, for example.

If this happens, it’s important that you get in touch with your DMP provider as soon as possible. Let them know about your situation and they’ll be able to tell you what options you have. You might be able to have a short payment break – this means you won’t have to pay anything for a couple of months and you’ll just start making payments again after this time. However, these months will just go onto the end of your DMP, so it will take you slightly longer to clear your debts.

But if your circumstances change more permanently – you’re getting fewer hours at work or you’re going on maternity leave – you’ll probably have to change your regular payment amount. You can speak to your DMP provider to do this but keep in mind that if you make smaller payments, you’ll be in debt for longer. And if a creditor hasn’t agreed to freeze your interest and charges, this means you could end up paying back more.

If you start to have a problem with your debt solution, you don’t have to go through it alone. Our advisors are available to talk to you and give you advice about how to deal with your problems – you can use any of the options to the left to get in touch. You can also find free and impartial information from the Money Advice Service.

by Emily Bancroft

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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.