If you're struggling to keep up with debt payments on things like credit cards, loans and store cards, a debt management plan (DMP) may be right for you.
This page explains what a DMP is, how it works and what you need to think about before getting one.
What are priority and non-priority debts?
Priority debts include:
mortgage or rent arrears
gas and electricity arrears
council tax or rates arrears
magistrates' court fines
arrears of maintenance payable to an ex-partner or children
income tax or VAT arrears
TV licence or TV licence arrears.
They're called priority debts because the consequences of not paying them can be more serious than for other debts. You usually can't include these debts in a DMP - check with the DMP provider. You'll need to choose another debt solution for your priority debts if you can't put them in a DMP.
Non-priority debts are less urgent and include things like bank loans, credit cards, student loans, water charges and benefits overpayments.
What is a DMP?
A DMP is an informal agreement between you and your creditors for paying back your debts.
You pay back the debt by one set monthly payment, which is divided between your creditors.
Most DMPs are managed by a DMP provider who deals with your creditors for you. This means you don't need to deal with your creditors yourself.
A DMP is not legally binding, meaning you're not tied in for a minimum period and can cancel it at any time.
Is a DMP right for you?
A DMP may be a good option if the following apply to you:
you can afford your living costs and have a way to deal with any priority debts, but you're struggling to keep up with your credit cards and loans
you’d like someone to deal with your creditors for you
making one set monthly payment will help you to budget.
However, you need to be sure you understand the impact a DMP will have:
it may take longer to pay back your debt because you'll be paying less each month
your creditors won’t necessarily freeze the interest and charges on your debts, so the amount you owe might go down by less than you think
your DMP provider might charge you a fee, although there are several free providers you can use so there’s no need to pay if you don’t want to
your creditors might refuse to co-operate or continue to contact you
the DMP may show on your credit record, making it harder for you to get credit in the future.
If you’re unsure about whether this sounds like it’s right for you, you might want to think about other options for dealing with your debts.
Joint debts and DMPs
If you have a debt in joint names with someone else, this can be included in your DMP. However, your creditors may still chase the other person for all of the debt. This is because whenever you take out a credit agreement, such as a loan or bank account, with another person, you're both liable for the full amount of the debt. This is known as joint and several liability.
If both you and your partner are struggling with debts, you might want to consider setting up a joint DMP where you'd both be equally responsible for the repayment plan. It doesn't matter if you have different levels of income or debts. You can also include debts that are only in one name in a joint DMP.
How to get a DMP
If you’ve decided a DMP is right for you, you’ll need to follow these steps to set one up:
make sure you've sorted out your priority debts first
work out your budget to see if you have enough available income to make your monthly payment
choose a DMP provider, remembering that you can choose a free provider
check the agreement or contract carefully.
Next steps
FAQs
Debt management plans are structured repayment plans to help you repay outstanding debt. In most cases, credit counseling agencies negotiate payment plans on your behalf. It also involves you restructuring your budget to pay off old debt, manage your current finances, and find other ways to become financially secure.
Which step is essential before you consider a debt management plan? ›
How a Debt Management Plan Works. The first step is to review your financial situation with a nonprofit credit counselor before you agree to a debt management plan. This will help the counselor design a plan that meets your needs.
Can I keep a credit card on a debt management plan? ›
Starting a debt management plan (DMP) means making some sacrifices, and one of the most immediate impacts is on your credit cards. If your DMP encompasses any of your credit card accounts, they will typically be closed. This closure is often a condition set by creditors in exchange for reducing your interest rate.
What is the average interest rate on a debt management plan? ›
Every participating creditor offers their own rates, but in aggregate, the average interest rate for accounts included on a debt management plan with MMI is below 8%.
Which debts can t you pay off with a debt management plan? ›
You can aim to include all debts in a debt management plan, but not all debt will qualify. Mortgages and other secured debts are not covered by a debt management plan, but in many cases it makes sense to include all of the debt that qualifies.
Can I keep my bank account with a debt management plan? ›
DMPs and Your Bank Account
You can often continue using your current bank account as normal. However, as specialists in DMPs, we recommend that you change your bank account if you have an overdraft that you have used and are now applying for a DMP.
Can I pay off my debt management plan early? ›
You are merely hiring someone to liaise with your creditors and divide your monthly payment between them. If your circ*mstances improve and you find yourself in a better financial position, you can pay off your debt management agreement early.
Do I have to include all debts in a debt management plan? ›
Include all of your debts.
Make sure all of your debts are included in the DMP, even if you think you can manage that catalogue payment or want to keep your overdraft 'for emergencies'. Sometimes you might have missed a debt from your plan, so be sure to let your DMP provider know about any changes as soon as possible.
How long after a debt management plan can I get credit? ›
The debts associated with your DMP may still stay listed on your credit report until the six-year period is up from when they were added – if they have defaulted or there are CCJs associated with them, for example – but the marker for your DMP will be removed.
What happens when you enter a debt management plan? ›
You'll need to send your debt management plan provider a payment each month, usually by Direct Debit. The DMP provider will then pay your creditors on your behalf according to the terms of the plan. You don't have to worry about contacting your creditors to reduce your payments; this'll be done for you.
A DMP may be a good option if the following apply to you: you can afford your living costs and have a way to deal with any priority debts, but you're struggling to keep up with your credit cards and loans. you'd like someone to deal with your creditors for you. making one set monthly payment will help you to budget.
What is a good monthly debt? ›
Debt-to-income ratio of 36% or less
With a DTI ratio of 36% or less, you probably have a healthy amount of income each month to put towards investments or savings.
What is the average debt per month? ›
Americans are tumbling deeper into debt, with the typical household paying $1,583 a month on various loans, a recent study found. That's a more than $300 increase from people's average monthly debt payment in 2020, according to LendingTree.
Do most creditors accept a DMP? ›
Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.
How long does a DMP stay on a file? ›
Instead, each debt in your DMP is marked as either 'AP' (arrangement to pay) or 'defaulted'. A debt with an AP marker stays on your credit report for six years from the date it is settled and a defaulted debt for six years from the first recorded default.
What happens at the end of a DMP? ›
The accounts you are repaying your DMP through will already be listed on your credit report, and once the DMP is complete the marker will be removed and the accounts themselves will be marked as closed – they will then remain listed for six years from the settled date.
