Repaying Debts Using a Debt Management Plan

Debt Management is a simple process which you can use to reduce and clear all your outstanding debts without the need to obtain any further credit than what you already have. If you choose to use a debt management company to assist you in this process, it will deal directly with your creditors and it will negotiate with your creditors on your behalf. It will seek the agreement of your creditors to drop all charges on your loan accounts and to freeze all interest. There are a number of benefits for you the debtor and for your creditors arising from your entering into and adhering to the terms of a debt management plan, commonly abbreviated to a DMP.

In the first instance a DMP is an informal and flexible arrangement designed to suit your own personal circumstances and needs. You make payments into the plan from your income on a regular basis, usually monthly, and payments are tailor made in line with what you can afford and sustain. In this way you will repay all of your unsecured debts to your creditors over a period of time. The duration of the DMP depends on the total size of your debts and the rate at which you can repay them and this can be calculated at the outset with a fair degree of accuracy. You will usually neither be forced to sell your property nor to remortgage it to release equity and contribute funds from that source into your DMP, although there are exceptions to this if your property equity is substantial, available and realisable. Your personal financial details will not be published on the Insolvency Register and your financial circumstances are not routinely made available to family, relations, friends or employers. Only the debt management firm you choose to engage and your unsecured creditors are privy to the DMP and they are bound by the constraints of their duties to you as a client and customer to preserve your rights to privacy and confidentiality and to comply with the requirements of the data protection legislation. Particular care is taken when making contact with you to ensure that others will not find out about your circumstances. It is also significant that creditors generally prefer their customers to enter into debt management plans than to engage in other processes for resolving their personal financial difficulties.

The liabilities that must be entered into your DMP are all of your unsecured debts. This means that you must include all personal loans including personal loans taken out jointly with your spouse or partner, credit card accounts, store card accounts and bank overdrafts. You do not include your secured debts such as your mortgage or your HP agreements. Secured debts must be prioritized in your income and expenditure calculations and you must make the full contractual payments of these, month in and month out, so that you do not fall into arrears on any secured debts. If you do fall behind in servicing your secured debts, you are in danger of having your house or car repossessed.

A major concern for anyone considering entering a DMP is how much they will have to contribute from their income. The reality is that a DMP is designed to ensure that you only have to pay what you can realistically afford to pay on an ongoing basis. That is why the amount to be paid is calculated by constructing an income and expenditure statement. This takes account of your household income and your living expenses, including the living expenses of your dependents. The amount you will have to pay each month depends on your personal circumstances and is calculated to suit your individual needs and those of your family and dependents. While you do not need to be employed to enter a DMP, you do need to have a source (or several sources) of income. Clearly the total amount of your income needs to exceed the amount you need to cover your household for living expenses. The amount by which income exceeds expenditure is the amount you will be required to pay into your DMP for the benefit of your creditors. The debt management company you have engaged retains a small portion of this payment to cover the administrative expenses of managing the DMP.

A second concern for anyone considering entering a DMP is whether creditors will agree to accept the offer of payment, the proposed DMP. No guarantees can be given in this regard. Creditors are not legally obliged to accept your DMP proposal and they may insist that you the debtor adhere to the original terms and conditions under which your loan was originally taken out. However, creditors are pragmatic and clearly if you are already falling into arrears in servicing a loan agreement it can make good business sense to accept a structured repayment plan such as a DMP really is, rather than pursue full repayment. There are many firms in the debt advice sector offering debt management services and which will negotiate with creditors on your behalf. Many of these firms have an excellent track record in getting proposals for DMPs accepted. However, creditors do not have to accept offers of reduced payments from debtors or freeze interest on loan accounts or stop applying charges for late payments. Neither is there a guarantee that any current debt recovery action will be suspended or that the threat of any proceeding or action will be withdrawn. Indeed any debt collection costs already incurred by your creditors will normally be added to your debt. Should you offer your creditors proposals for a DMP, the debt management company you choose to use will keep you informed regarding the progress of negotiations on all of these matters.

Should you decide to enter a DMP there are some practical housekeeping steps you will have to take to ensure the process runs smoothly. One of these is that you will almost certainly have to open a new bank account. Most people nowadays have their wages or salary or benefits paid into a bank or building society from which they have also taken out loans such as an overdraft or a credit card or a personal loan. This can be quite messy when the DMP commences, since your existing bank or building society may seek to use all of your wages or salary or benefits to address the deficits in your accounts with them, to the disadvantage of your other creditors. In these circumstances, it is better to open a new bank account with a bank or building society that is not connected to your existing bank or to any of your existing debts. You need to ensure that your wages or salary or benefits are paid into your new account and that your priority payments such as your mortgage, rent, council tax and car HP are made from your new account, setting up new direct debits as necessary. These steps will ensure that you remain in control of your income and that all of your creditors are treated on a fair and equitable basis. It is essential as well to cancel in writing (with your old bank or building society) all direct debits in relation to the unsecured debts that are being entered into your new DMP.

Entering a DMP is not free unless you choose to administer it your self. If you engage the services of a debt management firm, you will have fees to pay. These fees vary from one firm to another. Most firms charge a set up fee equal to the debtor’s first monthly payment into the DMP and retain this payment to cover the set up costs. This means of course that creditors receive nothing for the first month that the DMP runs. Thereafter, ongoing management charges are usually a fixed percentage of the monthly payment made by the debtor. The average monthly charge is 15% with a minimum of around £25 and a maximum of around £100. As you shop around, you will find that ongoing charges vary from one firm to another. Here is a typical example of how fees may be charged. Let us suppose that the debtor enters a DMP and agrees to make monthly payments of £300. The DMP firm retains the first payment of £300 in respect of set up fees. Thereafter, it charges £45 per month and distributes the remaining £255 to the debtor’s creditors on a pro-rata basis.

Entering a DMP will clearly affect your credit rating. Of course your credit rating may already be affected if you currently have arrears or a history of missed payments or late payments. When you enter your DMP you begin to make reduced monthly payments to your creditors as negotiated and agreed between you debt management firm and your creditors. Since this obviously means that you will no longer be making the contractual payments that you originally agreed with your creditors, records of these defaults may be made and probably will be made on your credit files. The credit reference agencies retain such records for six years.

Even if your circumstances should change while your DMP is up and running, because it is a flexible and informal process and not as rigid as other processes, your debt management firm can seek to agree a variation of your DMP with your creditors. Most DMP firms assign a liaison officer with specific responsibility for each debtor’s DMP and you should keep your contact person fully aware of your circumstances at all times and particularly in relation to any direct correspondence or to direct contact from your creditors or to any significant changes to your income and expenditure.

There are of course many alternatives courses of action other than a DMP that you might pursue if you find yourself facing financial difficulty. You should be aware of all of your options before you decide which way to go. Some of the most common alternatives are Bankruptcy, Individual Voluntary Arrangement, Debt Relief Order, Debt Consolidation, Asset Sale & Debt Settlement and Property Remortgage & Debt Settlement. It may even be that financial assistance is available from family or friends. The final piece of advice in this article and possibly the most important one is to please seek out and obtain independent advice if your finances are troubling you.

About Paddy Byrne

I work at National Debt Relief; a well established debt help company. I have had various roles throughout the company which has allowed me to enhance and develop my knowledge on Debt Solutions, legislation and other areas of the Financial Industry in both the UK and Ireland. I currently write for the National Debt Relief website, as well as other websites. I have written 100's of articles relating to different topics on debt.
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