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Tackling your debts

Debt Management Plan: How this solution works

Posted 31 March 2017 by Christine Walsh

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A DMP can really help you pay your debts back in an affordable way, but there are pros and cons.

A Debt Management Plan (DMP) is an informal solution to problem debt. It can provide you with the breathing space you need to pay your unsecured debts back at a rate that’s affordable and sustainable for you.


In this blog, we’re going to explore the pros and cons of this solution and where to go from here.


How does it work?


A Debt Management Plan is a new agreement that you come to with your unsecured lenders to reduce your existing repayments to an affordable level. You pay this lower amount back for as long as you need to in order to clear all of your debts.


It will be affordable


Of course, the big advantage of starting a DMP is the new, affordable payments.

What you pay on a DMP is carefully worked out so that you have enough money to pay for all the other important things in life.


Once you’ve paid any secured repayments, your mortgage or rent, travel costs, food costs and utility bills – anything essential – what’s left over is called your disposable income. It’s only this amount that you will be expected to put towards your debts on a DMP. It’s likely that your disposable income will change if your circumstances do, over the course of your DMP, but the amount will always remain affordable for you.


If you had more money to put towards your debts, then your payments would increase and you’d get debt free faster. If a change in circumstances meant that you didn’t have as much disposable money to put towards your debts, then this is something you can talk to your creditors about or your solution provider. It might be possible to reduce your repayments, if your creditors agree and can see you’re paying all you can, or it might be possible for you take a break from your payments for a while.


As we said, DMPs are not formal. So there’s nothing to stop your creditors taking further action against you. However, if they can see from your budget that you’re offering to pay as much as you can afford and they agree to the new repayment plan, it’s unlikely that they would take further legal action unless you suddenly stopped making your repayments. There’s no obligation for them to freeze the interest and charges on your debts, however in many cases creditors do agree to this if they can see that you are having problems with your repayments.


Because you are paying less towards your debts each month, it will of course take you longer to repay the full balance of the debt. But that might be better for you overall, if the lower payments means you’re able to manage better financially month to month and afford everything you need for you and your family.


Your credit history


Because you are lowering your repayments and breaking the terms of the original agreement that signed when you borrowed the money, your credit history will be damaged. If you have already defaulted on your account this will show on your credit history for six years from the date that you get the default. If you haven’t already defaulted, it’s very likely that you will when you start a DMP, and this will damage your credit history.


Your new payment agreement and the defaults showing on your credit history will make it harder to be accepted for credit and may mean that you’re not eligible for the best rates of interest, so borrowing becomes more expensive.

It may also make it harder to be approved for certain services, like mobile phone contracts and tenancy agreements. It’s also important to say that you shouldn’t borrow more money whilst you’re on a debt solution. Have a look at our previous blog to learn more about this and how to improve your credit rating once your debt solution is over.


The next steps


It is possible for you to negotiate lower payments with your lenders yourself. It would be a case of working out your budget based on your income and outgoings, coming up with an affordable figure for each of your creditors and speaking or writing to your lenders to ask them to accept it. Or you can use a debt solution provider to deal with the whole process for you. If you use a fee-charging provider, you will have to pay back your debts plus the fees that the provider charges.


When it comes to debt, it makes sense to get expert advice, to make sure you’ve found the best solution for you. You can contact one of our trained advisors using the options at the top of the page, the initial advice they give will always be free of charge.

 

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.