If you have debt, then you need a plan to manage it. You may benefit from having this formalised into an official debt-management plan. There are, however, advantages and disadvantages to this approach. Here is some guidance to help you decide if it’s right for you.
The basics of debt-management plans
A DMP plan is simply a formal agreement between you and your creditors regarding how your debt will be repaid. Typically, your creditors will make some concessions to you (or more accurately your situation). These might include forgiving arrears, lowering interest and/or writing off some of your debt.
DMPs are usually set up by charities or licenced companies. This often makes life easier for everyone as it ensures that the process is handled by people who know what they’re doing. In principle, there is nothing to stop you from negotiating with your creditors yourself. In practice, creditors may refuse to deal with individuals.
When you arrange a DMP through a third party, it is common for you to make a single payment to them. They will then arrange for this to be divided amongst your creditors. In principle, you do not have to do this (unless you are working with a private company and they insist). In practice, it often makes life easier for everyone.
Be aware that DMPs can only be applied to consumer debts such as credit cards, overdrafts and loans. There are a lot of exclusions such as anything owed to any government organisation (including fines), child-support arrears, mortgages and other debts secured on your home, utilities and hire purchase agreements (if they cover essentials).
DMPs from a creditor’s perspective
In principle, creditors can refuse a DMP. In practice, if your DMP is reasonable, there are two good reasons why they would be unlikely to do this. Firstly, the regulators expect to see them being supportive of customers in financial difficulties rather than profiteering from them. This is particularly true of credit card lenders who are being urged to tackle persistent debt.
Secondly, customers who cannot pay off their debts will end up having to go insolvent. If a DMP gives a creditor a better deal than they would have had in insolvency, then it’s in their best interests to accept it.
It’s also worth remembering that lenders have their public reputation to consider. These days, that’s not just headlines in the mainstream press. It’s also comments on social media. Quite bluntly, getting the reputation of treating borrowers harshly is unlikely to do them any favours with either.
Is a DMP right for you?
There are two factors to consider before you decide whether or not a DMP is right for you. Firstly, you need to think about whether or not you have a realistic chance of sticking to the payment schedule. Technically, even one payment issue could result in the whole DMP being cancelled. In practice, lenders may give you a bit of slack, but you shouldn’t count on it.
Secondly, you need to consider whether or not you’re willing to accept the hit to your credit record. For example, if you’d like to get a mortgage in the near future (or remortgage), then you might be better to look at other options, even if they’re tougher. Similarly, if you’re a renter then there’s a good chance that you’ll have your credit record checked if you sign a new lease.
If you do choose to try to protect your credit record, then you may find that the most pragmatic option is to try to throw everything you have at it for as long as you can. This isn’t sustainable over the long term. It can, however, be enough to allow you to qualify for better deals. This would allow you to lower your debt repayments without a DMP.