If you’re struggling to meet repayments on money you owe, you could consider setting up a debt management plan. Check if it’s the right option for you and do some research to find the best provider to set up and run your plan.
About debt management plans
A debt management plan is an agreement between you and your creditors (the businesses you owe money to) to make a set monthly payment. The plans are managed by companies known as debt management plan ‘operators’ or ‘providers’ who negotiate with your creditors and manage the payments for you.
Your monthly payment is based on how much you can afford to pay. This payment is then distributed fairly between all your creditors.
Starting a debt management plan means you are making a new promise to repay your debts in full.
When your debt management plan is being set up, your creditors will sometimes agree to freeze any interest charges. However, they don’t have to agree to this and they don’t have to agree to your plan at all. If they don’t, they can also continue to contact you, ask for payment or even take you to court.
Debt management plans can only be used to pay ‘unsecured’ debts, for example, money you owe that hasn’t been guaranteed against your property.
Some companies will charge you a fee for this while others give their services for free. Get advice before setting up a plan with a provider. Many organisations offer free and independent advice.
Advantages of debt management plans
Advantages to a debt management plan include:
- making one regular monthly payment allows you better control over your finances
- your creditors may agree to freeze interest and charges on your debt and may stop other action like taking you to court (although they don’t have to)
- peace of mind – in many cases, you will no longer be contacted by your creditors or debt collectors
- if you finish the plan, your unsecured debts will be cleared
Disadvantages of debt management plans
Disadvantages of a debt management plan include:
- your debts must be repaid in full – they will not be written off
- creditors don’t have to enter into a debt management plan and may still contact you asking for immediate repayment
- mortgages and other ‘secured’ debts are not covered by a debt management plan
Affording a debt management plan
You can only enter into a debt management plan if you have some money left over every month once all your essential expenses have been paid.
It’s a good idea to draw up a budget, including your monthly income and all your essential monthly household expenses, for example, your mortgage, rent, utility bills and 'hire purchase' payments.
If you have a very small amount left over after all these have been paid– or nothing at all– you should consider other ways to manage your debts.
Choosing your debt management plan provider
When choosing a debt management plan provider, you should make sure that:
- the provider is licensed by the Financial Conduct Authority (FCA)
- the provider discusses all the possible options available to you to deal with your debt problem
- you’re told clearly at the start how much it will cost to arrange the plan and who will pay that cost
- you understand what will happen if the provider stops running the plan for you because you’ve missed payments
- you’ve checked with other providers to make sure you’re getting a good deal
- Consumer Credit Register (FCA website)
Check the terms of your plan
Before starting a plan, the operator should make clear to you the terms and conditions, including:
- how much money you’ll be expected to pay each month and for how long
- the reasons the provider might stop operating the plan for you, for example, if you don’t make the required monthly payments
Get free advice about your debt
Setting up a debt management plan is an important financial commitment. Get advice to make sure it’s the right option for you.
You can get free and independent advice on debt management plans – or any kind of debt problems– from organisations likeAdvice NI.
- Dealing with debt problems
More useful links
FAQs
A Debt Management Plan is an agreement between you and your creditors to pay all of your debts. Debt management plans are usually used when either: you can only afford to pay creditors a small amount each month. you have debt problems but will be able to make repayments in a few months.
How much does a debt management plan cost? ›
The fees charged by commercial DMP providers will vary between companies, and are typically around 17% of your monthly payment each month.
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%.
Does debt management hurt your credit? ›
Even if you're in a DMP, your creditors may still record that you've missed payments, as you'll be paying less than you agreed to when you took out the original credit agreement. This will mean you could find it harder to get credit while you're making reduced payments and for some time afterwards.
Is it a good idea to get a DMP? ›
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.
Which debts can t you pay off with a debt management plan? ›
Debts you can and can't pay off with a debt management plan
Debt management plans are mainly designed for people struggling with debt from credit cards and/or personal loans. Student loans and secured debts such as mortgages and auto loans aren't eligible.
Do you lose your credit cards after debt consolidation? ›
So, if you have separate credit, they can keep their credit cards while you pay yours off through the program. This type of flexibility makes it easier to pay off your debt without disrupting your life or your business.
Can I get a loan while on a DMP? ›
A debt management plan affects your credit file. Most mainstream banks and lenders will be reluctant to lend to you once they see your credit file and they know you are on a debt management plan. The plan works by you making reduced payments, so defaults will appear on your credit file.
Will a DMP affect my bank account? ›
In conclusion, a Debt Management Plan (DMP) does not directly affect your bank account. You can usually continue using your current bank account as usual when you enter a DMP providing that you do not wish to include a debt on your DMP that is with your bank account provider.
What happens after 6 years on a debt management plan? ›
What happens when my DMP is finished? 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.
Your debt management plan (DMP) should have no direct effect on your home if you keep up with payments to your debts and rent or mortgage. Rent or mortgage payments are a priority. Not paying them can be bad.
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.
What is the best debt settlement company? ›
National Debt Relief is the best overall debt settlement company, according to our research. National Debt Relief's low-cost fee structure and referral service make it a top option for people struggling with debts. Our highest-rated debt settlement companies all charge similar fees, ranging from 15% to 25% of the debt.
When should you use debt management plans? ›
Debt management plans are usually best for people who are deeply in debt but can still make the required monthly payment. You'll also have to check whether your debt qualifies for the plan. There are alternatives to a DMP, such as bankruptcy or a debt consolidation loan.
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.
What happens when you finish debt management plan? ›
They usually take three to five years to complete, and you must agree not to use or take on any additional credit during that time. You will likely have to close the credit cards that are part of the plan. At the end of your debt management plan, your accounts will be completely paid off, and you'll be debt free.
