If you’re in a lot of debt and you’re looking for ways to get out of it, you may be wondering what is a debt management plan and whether it can help you get on top of your finances. Read on to find out how DMPs work.
What is a debt management plan?
A debt management plan is an informal agreement between a person in debt and their creditors. It allows you to pay a set amount each month and, often, for any interest and charges to be frozen.
A debt management plan is designed to help people with problem debt to pay their creditors and get out of debt without their finances spiralling out of control.
If your debts are accruing interest at a rate which makes it extremely challenging to keep up, this could be an option to consider.
How do debt management plans work?
If you choose a debt management plan, this means your creditors will receive a lower monthly payment than you’re currently expected to pay.
Usually, creditors will stop adding interest and charges so that you’ll be able to pay off your debts much sooner – though this isn’t always the case.
Sometimes you’ll work directly with your creditors and pay them individually but there are other times when you may pay a monthly sum to a specific firm which will deal with all your creditors on your behalf.
What are the pros and cons of debt management plans?
Pros
- You’ll get some breathing space to get your finances back on track
- Hopefully your debts will no longer accrue interest or charges
Cons
- Debt management plans can take a long time to complete, particularly if you have a lot of debt
- There’s no guarantee all creditors will agree to freeze the interest
- Some creditors may even resort to court action to get the money you owe them back in full
- A debt management plan is likely to have a negative impact on your credit score
What’s the catch?
If the thought of freezing interest sounds too good to be true, it’s because there are certainly some downsides.
Having a debt management plan could make it difficult for you to get a mortgage in future. This doesn’t make it impossible, but potential mortgage lenders may be concerned about your ability to manage debt affectively if you’ve had to venture down the debt management route.
How do I get a debt management plan?
Some debt management companies will charge you a fee for their services. Usually, these companies are best avoided.
StepChange and Payplan are two companies that can arrange a debt management plan for you for free.
Contact them by phone or email and arrange a phone call to discuss your situation. Be as organised as possible with your financial summary and a full list of your creditors at your side.
The company you contact will assess how much money you owe along with your income and average expenses, so it helps to have as many details as possible jotted down on a piece of paper before your appointment.
They may advise that a debt management plan is unsuitable for you. If this is the case, they’re likely to offer an alternative. Remember that these people are experts and help hundreds of people in your situation each week.
If a company such as StepChange or Payplan agrees to create a debt management plan for you, you’ll need to confirm this in writing. The finer details will be explained to you before you sign anything.
Can I make my own debt management plan?
Although you can get a firm to create and manage your debt management plan on your behalf, you also have the option to do it yourself.
Don’t worry – you don’t need fancy legal knowledge or anything like that.
Simply write a letter to each of your creditors to say you’re unable to make the current monthly repayments but you are able to pay £X amount each month. Politely ask them if it’s possible to freeze interest and charges so that you can get the debt repayed.
When you arrange this yourself rather than getting a specialist firm to do it for you, this is often known as ‘making arrangements to pay’ rather than a debt management plan – though they’re essentially the same thing.
Is there an alternative to a debt management plan?
Yes. A debt management plan won’t be right for everyone and it may be the case that there are more suitable options out there for you.
StepChange or Payplan and they’ll give you free advice to find the right option for you.
