What if my circumstances change during a Debt Management Plan?
Because a Debt Management Plan is an informal agreement, you are not legally bound to maintain the agreed monthly repayment and as such you can change it at any time.
Change for the worse
If your financial situation worsens and you have to reduce your monthly repayments, you will need to inform your creditors of this. It is likely that you will have to re-present an income and expenditure statement to them explaining the effect of the change. In reality, if your circumstances have become even worse, it might be sensible for you to consider one of the alternative ways to resolve a debt problem – perhaps Bankruptcy.
Change for the better
If your financial situation has improved, then it is a good idea to increase the monthly amount that you pay into your Debt Management Plan as this will repay your debt faster. Alternatively you may now be eligible for an alternative solution such as an IVA which could allow you to become debt free faster.
How does a Debt Management Plan work?
A DMP or Debt Management Plan is an informal agreement with your creditors. If you are in financial difficulty, it allows you to reduce the amount you pay to your creditors each month so that your payments fit within an affordable monthly amount.
Using a debt management plan will enable you to start repaying your creditors without having to borrow more and constantly “Rob Peter to pay Paul”.
It is not a legally binding document however and has no fixed term. This means it can last several years as you have to pay back the full amount of your debt. It can be a useful temporary solution if that is what you need.
Can I keep some of my debts out of a Debt Management Plan?
A debt management plan is a flexible solution. This means that you can choose to keep out certain debts and continue to pay them normally if you wish. This may be useful if you want to maintain a line of credit such as a credit card.
However, as a general rule you should include all your unsecured creditors within the plan. If you favour one creditor over another, this could lead to problems when negotiating, as your creditors may feel you have not treated them all fairly.
Furthermore if you are keeping a debt out of the plan so that you can continue borrowing money (e.g. a credit card) you are just getting further into debt and not resolving the problem. It is always best to include all of your unsecured debt within your plan and ensure that your budget for household expenses is realistic so that further borrowing is not required.
How long will a Debt Management Plan last?
There is no limit on the length of time a Debt Management Plan will last. It will depend on how much you owe and how much you can afford to repay each month (your Disposable Income). There is normally no agreement from your creditors to write off any of the debt and therefore you will have to continue with the plan until all the debt is paid in full.
If your creditors continue to add interest and late payment charges, then these will have to be repaid as well extending the length of the plan still further. This means that a Debt Management Plan may last several years.
Because there is no agreement with your creditors to write off debt, in practice it is normally not sensible to use a Debt Management Plan to try and solve a serious debt problem which will take more than 5 years to repay. Often, a Debt Management Plan will be used as a short term fix until your financial circumstances improve – perhaps you get a wage increase, your wife returns to work or children go to school.
How long does it take to set up an Debt Management Plan?
It is very quick, as there is no consultation period like an IVA. You can have a plan set up in a matter of a few weeks.
What will happen to my credit file if I go into a Debt Management Plan?
If you start a DMP, your creditors will record that you have not maintained your monthly payments as per your original agreement and will issue default notices against you. This will mean that your credit rating becomes worse and you are prevented from borrowing more money until the debt you already have is repaid.
Your credit rating is not made worse just because of the fact that you are in a DMP. If you are struggling to repay your creditors and start to miss payments for whatever reason, they creditors will issue defaults against you which will be recorded on your credit file and make it difficult to borrow more money.
Often people who go into a DMP already have a poor credit rating because they have already missed monthly payments to their creditors. If this is the case, undertaking a DMP will not make your credit rating any worse.
Although the fact that your credit rating is effected sounds bad, in fact all that is happening is that you are being prevented from borrowing more money.
How much will a Debt Management Plan cost?
You may be able to get help with an informal debt management programme for free. However, most companies who provide these services will make a charge. This will include an Instruction or Drafting fee which is normally the first one or two disposable income payments that you make. Then you will have to pay a monthly management fee normally around 15% of your disposable income.
How much will I pay into a Debt Management Plan each month?
Normally creditors will want to see payments of between 0.5% and 1% of your total debt paid back each month within the Debt Management Plan. However, payments are based on your Disposable Income. Disposable Income is the money you have left after you have paid for all your essential and reasonable living costs.
Creditors do have limits to what they accept on spending, as of course they will get less money if you are spending more on living costs. Because the plan will last until you have paid back 100% of your debt, it is in your interest to repay as much as you can reasonably afford each month.
What happens to my house and car in a Debt Management Plan?
As long as you maintain your mortgage, secured loan and any car HP payments, then your house and car will not be at risk.
When calculating your disposable income, your house and car payments will be included within your reasonable monthly living expenditures and therefore you will have enough money each month to pay for them.
Mortgage and car HP debts can and will be treated preferentially and are therefore not included within the list of debts that reduced within the Debt Management Plan.
What happens when I stop paying my Creditors for a Debt Management Plan?
When you stop paying your creditors, they will start to chase you for payment. This will be in the form of both collection letters and telephone calls telling you that you must repay your debt.
Unfortunately, this situation can be quite stressful for many people. However, once you start to make your regular monthly Debt Management payments, the amount of contact you receive from your creditors will reduce.
Which debts can be included in a Debt Management Plan?
Normally any unsecured debts can be included within a DMP. These include but are not limited to:
• Credit Cards
• Personal Loans
• Catalogue Debts
• Store Cards
• Overdrafts
• Outstanding balances after home or vehicle repossession
• Business loans for which you are personally responsible
Who knows that I have a Debt Management Plan – is it made public?
A Debt Management Plan is a private arrangement between you and your creditors and is not made public in any way.
Will all my Creditors agree to a Debt Management Plan?
Usually the answer to this question is yes because they are not writing off any debt and can see from the income and expenses provided that you cannot afford any more.
Whilst your creditors are not under any legal obligation to agree to the plan, all financial institutions have been advised by the government to look favourably on such applications so as to reduce the potential number of bankruptcies and allow people to repay what they can afford.
Will my Creditors freeze the interest and charges on my debts?
When you carry out a Debt Management Plan, your creditors are under no legal obligation to freeze interest or late payment charges. For this reason, your debts will almost certainly increase in the first few months of being in this type of plan.
When your creditors see that you are making the regular agreed monthly repayments under the plan (normally after 2-3 payments have been received), most will freeze the interest and late payment charges. However, this can not be guaranteed for all creditors.
Which debts cannot be included in a Debt Management Plan?
Secured debts such as mortgages and other secured loan repayments including any items on Hire Purchase can not be included in a debt management plan and will be repossessed if repayments can't be made.
Arrears for Rent and Council Tax can not be included in a debt management plan. In addition, Crown debts such as Income Tax and VAT cannot be included. A provision to repay these debts will normally have to be made within monthly living expenses before disposable income is calculated. If you have these types of debt you might be better suited to an IVA.
There are other debts that may not be accepted in a debt management plan. These include:
- Any fine or penalties imposed for an offence - Any liabilities arising under an order made in a family or domestic court action such CSA claims for child support - Any liabilities arising under a confiscation order made under S.1 of the Drug Trafficking Act 1986 0r S.71 of the Criminal Justice Act 1988.
My bank is a Creditor; should I open a new bank account?
If you undertake a Debt Management Plan and you owe money to your bank, perhaps in the form of a credit card, personal loan or overdraft, you will almost certainly need to open a new account with a different bank. The reason for this is that to resolve a debt problem, you need to be able to ensure that you are in full control of your money and keep your income separate from all your creditors.
If you need to open a new account, you should ask for a basic account only with no overdraft facility. You should be able to do this even if you have a poor credit rating. There are many banks which offer this facility. Please follow this link for more information about opening bank accounts.