Is a DMP the same as an IVA?
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Have you looked into whether a DMP could help you get on top of your problem debts? Our list of advantages and disadvantages should point you in the right direction.
Debt Management Plans are designed to help people who are struggling to manage their unsecured debts. They are one of a handful of debt solutions available and, like all the others, they have their advantages and disadvantages. Whether or not a DMP will be right for you depends on your own personal circumstances but looking into debt solutions is definitely a step in the right direction if you feel that your debts are getting out of control. So, let’s look into DMPs in a bit more detail to see whether this could be the right choice for you.
How do they work?
DMPs involve taking a good look at your finances to work out what you need for essential outgoings, like food, housing and bills. What’s left over after those costs is known as your “disposable income” and this is what you could afford to put towards your debts. Going through your income and expenditure in detail is a really important part of setting up a DMP because that will tell you what you can realistically afford to pay back every month. You can then ask your lenders if they are willing to accept a lower monthly amount, giving you more time to pay off what you owe. Lenders may also agree to stop charging you interest or adding extra costs to what you owe once you are on a DMP, although they won’t always agree to this.
DMPs are not a “formal” debt solution, which means they are not legally binding. They can be set up either directly between you and your lenders, or they can be arranged by a debt solution provider, such as ourselves.
If you chose to use us to arrange a DMP for you, then we take on the responsibility of putting together a proposal for your lenders. We’ll contact your unsecured lenders to see whether they’re willing to agree to the lower monthly payments and we will ask them to freeze interest and charges. We’ll also deal with any letters, calls or emails from your lenders, as well as making sure that it’s all running as it should be. There’s a charge for this service, so make sure that you understand how it works before you agree to anything. If you would like to look into this further, here’s the breakdown of our fees.
Whether or not you choose to use a company like us to set up your DMP is up to you, it just depends on whether you feel confident working out your own income and expenditure and dealing with the lenders yourself.
Advantages of a DMP
If you’ve found yourself with more unsecured debt than you can manage, but you could afford to make lower monthly payment, a DMP could be a good choice. If you use us to arrange your DMP then you would just make a single affordable monthly payment to us, and we would distribute payments to your lenders for you (after deducting our fee) which simplifies your finances. Let’s have a quick look at the advantages of starting on this type of solution.
If your lenders can see that you are genuinely struggling, it’s likely that they’ll freeze the interest and charges on your debts – this means that the debt would not continue to grow whilst you’re on the plan. It’s also highly unlikely that your lenders would proceed with court action once you have started a DMP – they’ve agreed to the new payment plan and will be receiving regular payments towards the debt, so court action is not likely.
A DMP allows you to look forward to a date when you can be debt free – if your debts have been on your mind and causing you stress, this might come as an enormous relief and be a weight off your mind.
It’s far easier for you to budget and manage your finances – knowing that all your unsecured debts are being dealt with in one monthly payment means you can rest assured that everyone is being paid and you’ve got enough money to live on each month.
Once you start a DMP you’re not locked into it for a certain period of time as you would be with other debt solutions. A DMP, therefore, can be used as a temporary solution if you just need some time to get on more secure financial footing. For example if your financial difficulties have been caused by a short period of unemployment, or if you’ve been unable to work due to illness, then a DMP might be a suitable way to get back on your feet finically. Once you’ve paid a lower amount towards your unsecured debts for a time you may feel that your circumstances have improved enough for you to go back to your normal payments. This wouldn’t be a problem at all - in this case you’d simply get in touch with us, we’d let your lenders know and things would go back to how they were before.
Disadvantages of a DMP
As mentioned earlier, because you pay less each month it will take you longer to repay the debt overall, so you need to take this into account. Although, it’s likely that the lender will freeze the interest and charges they’re not obliged to do so, as they would be if you entered into a formal debt solution, like an IVA. If they don’t agree, this amount would continue to build up as the DMP went along.
A DMP will have an effect on your credit rating which is, unfortunately, unavoidable. A DMP stays on your credit rating for six years after it ends. This means that if you try to borrow while the DMP is on-going, or in the six years it’s on your credit file, you may find that your options are limited and that you aren’t approved for the most competitive rates of interest, so this is something to consider.
A DMP will only take care of your unsecured debt, so if you’ve got secured debts that are a problem, a DMP might not be right. Having said that, if you have a mixture of these types of debt, bringing the unsecured debts repayments down could give you the breathing space you need to deal with your secured debts.
DAS could be an alternative
If you live in Scotland and have problem debts then DAS (Debt Arrangement Scheme) is a possible alternative to a debt management plan. Unlike debt management plans the payment plan you agree to on DAS (known as a debt payment programme or DPP) is legally binding, so your creditors will not be able to take any further action against you once this is agreed. In most ways however, DAS works very similarly to a DMP, so it would allow you to pay something affordable back towards your unsecured debts every month and would continue until they are paid off. On a DAS the lenders included in it must freeze any further interest and charges, but your credit file would be affected in the same way as if you started a DMP.
If you want any more information about DMPs or DAS, don’t hesitate to contact us. Our debt specialists are ready and waiting to answer all your questions and can help you make the right decision. Just use one of the ‘contact us’ options on the left of the page.
by Christine WalshBack to blog home