Debt Management Plans (DMPs) are much in news reports at the present time. Several undesirable aspects of the industry made the biggest headlines. As with any industry a couple of bad apples can give the barrel a bad name. In the United Kingdom the Office of Fair Trading (OFT) has already taken steps to deal with the bad apples. Quite possibly the most significant infractions it has observed happened in the areas of marketing and charging behavior. In September 2010 it gave a warning to 129 debt management companies and followed that up with high profile enforcement actions against the worst offenders. The OFT intends to publish revised debt management guidance in June 2011. It is not apparent at this stage whether or not the government plans to introduce any legislation to manage DMPs. Even so the Ministry of Justice has issued a consultation document about the way ahead for DMPs. Three options for regulation are being indicated. These are to somewhat make improvements to control by the OFT, to propose sector self control with voluntary codes of practice and/or to develop a fresh solution i.e. a statutory DMP. Since the DMP is the predominant personal insolvency solution in the UK nowadays, it is perplexing that the government appears to shrink from the task of legislating in this area. What is the present condition of national debt management and how does it result in relief to citizens?
A DMP is an informal functional method for resolving a personal personal debt difficulty by which creditors are remunerated in full over a period of time. The speed at which lenders are paid back is dependent on what the person is able to afford and therefore a DMP may last for a considerably long time. You could potentially administer your own DMP by doing business one-on-one with your creditors. These self administered DMPs are sometimes referred to as SA DMPs or DIY DMPs. Still, most people who enter into a DMP do so with third party help, and make use of the help of a commercial debt management organization or one of a number of charitable organisations. These include the CCCS and Payplan as well as CAB who can offer invaluable free advice and assistance.
Why should the financially troubled debtor utilize a third party professional to help set up a DMP with lenders? There are two key reasons for this. First and foremost, debtors in many cases are uncomfortable in trying to contend with their lenders directly. Furthermore ,, creditors themselves often prefer to work with a service provider who understands the need for efficiency and appropriate structures in managing a DMP without having the (understandable) emotion and personal upset that engaging directly with a troubled debtor may entail. The information and experience acquired by service providers, in dealing with lenders over many years, gives debtors a degree of assurance and assurance that their DMP will be managed without problems and with the minimum of trouble and undesirable phone calls from lenders.
Is it possible to obtain new credit during a DMP? Because it’s an simple process, you can not be prevented from obtaining additional credit when participating in a DMP. However, it is against the nature of the plan that you should do this and lenders who have accepted your DMP to begin with may and probably will definitely reject it if they learn that you have broken the nature of the agreement in this way. The reason is , you made a commitment to make use of all of your disposable income to trying to repay your existing obligations when you went into the DMP.
Exactly what debts are covered by a DMP? All unsecured obligations including loans, credit cards, store cards and bank overdrafts are covered. Your secured debts such as your mortgage or HP agreements are prioritized in your income and expenditure calculations, so that you do not go into default on these obligations.
What are the benefits of a DMP? Creditors generally give preference to debt management to other systems for resolving monetary problems mainly because in due course you will pay back your entire debts. From the debtor’s perspective, you don’t have to release equity from property, you pay what you can afford, your DMP is structured to fit your unique situation and requirements and your details won’t be put on the Insolvency Register.
How much should a DMP cost? All depends on who you use given that debt management fees differ from one provider to another. It will probably pay to shop around before you decide to select your service provider. A large number of DMP service providers charge a set up fee the same as the debtor’s initial monthly instalment into the DMP. Because of this creditors get nothing through the first month the DMP is operating. Thereafter, fees are generally a set percentage of the monthly instalment made by the borrower. The average monthly fee is in the region of 15% with a minimum of about £25 and a maximum of approximately £100. Whilst you research options and rates, you will see that fees fluctuate. One example is, if you enter into a DMP and agree to make monthly installments of £300, your DMP provider keeps the initial payment of £300 in respect of set up charges and thereafter it charges £45 per month. It distributes the remaining £255 to your creditors on a pro-rata foundation.
Exactly what is the consequence of going into a DMP on the debtor’s consumer credit rating? The reality is that the credit score may possibly already be affected if the debtor has arrears of payments or a record of missed repayments or late payments. The debt management provider negotiates lowered monthly payments with creditors, and the primary contracts will end up being broken. Defaults are likely to be documented on the debtor’s credit rating and credit reference specialists continue to keep such reports for not less than six years.
Does a consumer really need to be insolvent to enter a DMP? No, it isn’t a precondition to be insolvent. It might be that the debtor’s income in addition to any property they might have is enough to repay all debts completely in keeping with the terms under which the funds were taken out. In spite of this, the debtor might be loath to do several unpalatable things to pay the balance of the financial obligations. For instance, there could be enough value in the debtor’s home to settle the debts when combined with the debtor’s income. It could consist of selling the family home to release the value if the debtor cannot get a remortgage or if the conditions of a sub-prime remortgage are prohibitive. A DMP could possibly provide a means of delaying the sale of the family home or offering the debtor some relief until such time as a remortgage can be arranged on competitive conditions.
Will lenders approve the debtor’s offer of settlement in a DMP? There are various DMP service providers with long experience of negotiating with creditors and who have a good reputation for getting proposals accepted. Even so, lenders are not required to accept reduced payments or freeze interest and penalty charges and there’s no certainty that any active or threatened legal action or proceeding is going to be suspended or withdrawn. What’s more, any debt collection cost incurred by a lender is frequently added to the debt. The DMP service provider will keep the debtor up to date with regards to the situation and progress of talks on reduced payments.
Does a debtor have to be employed to be accepted into a DMP? No, but it is essential to have a form of income which is higher than what is necessary for living costs. Most of the people who end up in a DMP are employed. However, individuals who have fairly recently become unemployed and who are positively seeking out a job could certainly contemplate offering their creditors a short term DMP, especially when they have really good prospects of securing employment which has a reasonable level of disposable income. Whilst people whose entire income is comprised of benefits may offer a DMP to their creditors, the quantity of disposable income is probably going to be very low and it may well be that an alternative choice for example bankruptcy or perhaps a Debt Relief Order may well be a more effective and acceptable choice.
Are employers informed about their employees entering into a DMP? Reputable DMP companies give total confidentiality and privacy with regards to the monetary affairs of debtors. No information about the borrower is revealed to any external firms or other citizens for instance the debtor’s company. Particular care is taken when making contact with the borrower making sure that other individuals will not find out about the debtor’s circumstances. Of course the debtor really ought to behave prudently in contact with creditors and with any third party advisors to ensure that the DMP is not accidentally revealed to the employer.
Just how long does a DMP keep going? That ultimately is dependent upon the debtor’s individual circumstances. Still, the DMP provider should be able to assess just how long the payment plan is probably going to keep going, once it has acquired all of the debtor’s personal data particularly the volume of the money owed and the debtor’s disposable income. Seeing that all the debts will be settled entirely, the duration of the DMP is often quite extensive.
Does the borrower have to open a new bank account when entering into a DMP? Yes, almost definitely. Many people in the present day get their wages/salary/benefits paid into a bank or building society with which they also have borrowings – for example an overdraft account, credit card or personal loan. This might be quite messy once the DMP commences, because the existing bank or building society may possibly look to utilise all of the debtor’s wages/salary/benefits to address the deficits in the debtor’s accounts with them, to the disadvantage of the debtor’s other creditors. So, it is advisable to open up a new bank account with a bank or building society that is not attached to your existing bank. The debtor has got to ensure that wages/salary/benefits are paid into the new account and that priority payments (mortgage, rent, council tax, car HP etc) are made from the new account also. Any direct debits with the debtor’s current bank need to be terminated in writing and applicable lenders advised. These measures ought to make certain that the consumer continues to be in control of his or her income and that all lenders will be dealt with consistently and on a fair and equitable basis.
What will happen if the debtor’s circumstances vary while in a DMP? Because a DMP is flexible and informal, it is not as inflexible as other systems. The DMP provider will normally have allocated a contact or liaison officer with specific responsibility for the debtor’s DMP. The consumer should be aware of who that contact person is and keep them fully cognizant of their situation at all times, especially in relation to any direct correspondence with or contact from lenders or any adjustments to income and expenditure. The DMP provider will need to then speak to lenders and explain any problems that arise as a result of such altered circumstances and present solutions that satisfy the borrower and lenders.
What are the alternate options to a DMP? There are several alternative courses of action open to anyone in financial trouble who is seeking relief. The debtor should be aware of all available options prior to deciding on which approach to take. Among the most prevalent options are Bankruptcy, Individual Voluntary Arrangement, Debt Relief Order, Debt Consolidation, Asset Sale & Debt Settlement and Property Remortgage & Debt Settlement. It might even be that financial help is available from a member of the debtor’s family or friends.