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How do I start a debt management plan? 21 February 2012
James Falla (about the author)

If you are struggling with debt we ask how you can go about setting up a debt management plan to help resolve your debt problem.

Debt management plans (DMP) are one of the most widely used debt management solutions. 

A debt management plan involves asking your creditors to accept reduced payments towards your debts each week or month so that they fit into a budget that you can afford. 

The debt management plan solution is in informal agreement with your creditors. It is not legally binding and can be broken by you or your creditors at any time. 

However this informality is also one of the advantages of the DMP. It means that a DMP gives you more flexibility than any other debt management solution and most importantly, you can undertake the negotiation yourself if you want to.

Understand what you can afford to pay towards your debts

Debt management plans turn debt problems on their head. Instead of worrying about what you should be paying your creditors each month, the debt management plan allows to you pay what you can really afford. 

The first step to starting a debt management plan is therefore to understand what you can afford to pay your creditors. This is known as your disposable income.

You work out your monthly disposable income by taking your total monthly income and deducting your reasonable monthly living expenses. The money you have left is your disposable income - the amount available to pay to your creditors.

Of course the key to getting your disposable income right is to properly calculate your living expenses budget. The best way to do this is to follow a living expenses budget guide which will help ensure that you do not miss out any important expenses and that the figures you use are reasonable.

Reasonable DMP living expenses

When you eventually speak to your creditors and ask them to consider reducing the amount that they will allow you to pay each month, they will ask to see a copy of your income and living expenses budget.

This is a reasonable request as they will want to assure themselves that you are doing the best you can to pay them and have made all reasonable reductions to your living costs.

For this reason when you are putting together your living expenses budget you must remember that you should try to keep the individual expenses within the expenses guidelines.

Having said that debt management plans are informal agreements. As such if your creditors do not agree with the living expenses you include in your budget, they cannot stop you from starting your DMP anyway.

However if your creditors do not agree with your budget and feel that you are maintain expenses that are unreasonably high, they could respond to your DMP payment offer by refusing to freeze the additional interest and or charges that they apply to your accounts.

Clearly it is therefore in your interest to stick to a reasonable living expenses budget that your creditors will accept.

Negotiate the DMP with your creditors

Once you have calculated the amount you can offer your creditors, you then need to start the negotiations with each of them.

The amount you can afford to pay in total (your disposable income) is split on a pro rata basis between each creditor you owe money to. This means that if one creditor is owed 50 percent of the overall debt, they will be offered 50 percent of your disposable income and so on.

If you have the time and confidence to speak to your creditors and make this offer yourself there is no reason why you should not do this and thus start your own debt management plan. 

Normally these negotiations will take time and considerable effort. In addition you need to start paying the reduced payments to all of your creditors. For your DMP to have any chance of being successful you must make sure these payments are made on time each month which needs you to remain extremely organised.

For this reason many people feel that they would prefer to allow someone else to negotiate their debt management plan for them and then take charge of making the monthly payments on their behalf. 

Implementing a DMP with third party help 

There are many organisations that will help you start your debt management plan. They can negotiate with your creditors on your behalf and then take on the job of making the payments to each creditor every month.

The majority of debt management companies are commercial and will charge you a fee to negotiate with your creditors and make your payments for you.

However there are also some organisations which will help you start a DMP for free. 

There are a number of arguments about whether it is better to use a fee charging or free DMP service. However which ever choice you make, one of the advantages of debt management plans is their flexibility. 

This means that if you start your debt management plan with one organisation but find that for some reason you are not happy with the service provided you can simply switch to using a different one within a very short space of time.

Things to watch out for once DMP started

The most important factor for a successful debt management plan is to ensure that each month you make payments to your creditors, your overall debt balances go down.

One of the key reasons why your balances will not go down each month and in some cases even increase is because interest and charges are still being applied to your accounts.

Once you start paying your DMP you must make sure you look at all of the statements that your creditors continue to send you to ensure that interest and charges have been frozen or at least minimised.

If this has not happened, then you need to contact the creditor in question and ask them again to freeze their charges. If you are using a third party you need to make sure they are aware of the problem and are acting to resolve it. 

At the end of the day, one of the downsides to a debt management plan is that there is no guarantee that all of your creditors will freeze their interest and charges. However after a number of months of receiving payments on time, most should do so.

Nevertheless, many people who start off negotiating DMPs themselves eventually chose to use a third party because they have not been successful in getting interest and charges stopped. Likewise the primary reason for changing the third party you are using is that they are not working hard enough to achieve frozen interest.

Related DMP articles

If you are interested in reading more expert articles about debt management plans, please click on the following link: http://www.beatmydebt.com/forum/viewforum.php?f=49

What to do next

If you are struggling with debt and are considering a debt management plan, visit www.beatmydebt.com

Our experts are available to speak to you about the DMP option and offer further help and advice.

Our vibrant debt forum gives free access to experienced industry experts and others who have suffered with debt problems and have been through the DMP process themselves. 

Useful guides, calculators and information are also available designed to help you understand how to manage and resolve debt problems.