“Debt management” and “Debt Management Plan (DMP)” are names for an agreement with your creditors for you to pay less each month than the usual amounts. Your creditor is asked to freeze interest and not add charges and they usually agree to this.
A DMP is an informal agreement – you don’t have to sign a legal contract. That makes these a perfect option if you think your situation is likely to change over the next few years. Some people who have just phoned a creditor and come to an arrangement to pay less for the next 6 months may not even think of themselves as “being in debt management”!
For the best introduction, read What is a DMP? That looks at all the basics, including who they are most suitable for.
Then this Guide to DMPs provides links a pile of detailed information. Everyone’s debt case is different, so just ignore the ones that don’t sound relevant for you and investigate those that do. Then you can:
- decide if debt management is suitable for you and your family;
- decide if you want to “self manage” or use a debt management company;
- look at what can happen during a DMP and what your later options can be.
How much will you pay each month?
How much should you pay each month is the key question – too much and and you won’t be able to manage it; too little and your DMP may never end:
- How much should you cut back?
- Offering a token payment to a debt
- What is a realistic payment for a £10,000 DMP?
- Would I have to sell my car in a DMP?
- Using disability benefits to pay a DMP
Is a DMP right for you?
If you aren’t sure if you need one, see Can you just about manage without a DMP?
If your debt problems are going to be temporary, debt management is almost always your best option.
With a long term problem, think about things that can go wrong in a DMP – but don’t forget that things can also go right, you may get a better job, or your child care costs go down etc:
- Is the idea of debt management scary? If you don’t want to make the wrong decision, find out the things that are worrying you turn out to be problems in practice or not.
Debt management does hurt your credit record (see below for details about this) so you don’t want to do it if it’s not going to work:
If you are wondering how you would cope with debt management, would it be easy to live with, then look at the results of a big survey of Payplan clients Living in a DMP – what is it really like? And if your partner doesn’t have problem debt, you may be worried about How a DMP affects your partner.
Do you have a better alternative?
The main formal debt options are the three types of insolvency: IVAs, bankruptcy and Debt Relief Orders. Find out if a formal arrangement might be better for you, or if the informal DMP suits you:
A key thing to focus on is how long you are likely to be in debt management. You can make a good guess by assuming that all your creditors will freeze interest, then divide your debt total by your monthly payment and the answer is how many months to pay it all off. For example:
Total debts £7,400. Monthly DMP payment £100.
DMP length = 7400/100 = 74 months, so a bit over 6 years
If your DMP sounds too long then one of the other debt solutions may be better, so look at these detailed comparisons:
- Long-term debt management or bankruptcy
- IVA or a DMP
- a Debt Relief Order a DRO could be your best option if you are renting and your debts are less than £20,000.
Set up your own DMP?
This is surprisingly easy. Many people like it because it helps them feel in control and they don’t want to explain their finances to a DMP firm or have annual reviews:
- if you only have one or two creditors, just phone or write to them to reach an agreement about lower monthly payments and freezing interest ;
- if you have more creditors, you may find it helpful to use the free CABmoney facility which this generates letters and calculates payment offers then generates all the letters for you to print and send .
If you are worried this will be too complicated or take too much time:
Or use a company to run your DMP?
If you use a company to set up your DMP, this works as follows:
- you phone the firm and they talk through your debts and your income and expenditure;
- the firm should suggest if you have any debt options which look better than a DMP – take these seriously!
- you agree a monthly payment with the firm – this isn’t fixed, but make sure you think its affordable at the start;
- you set up a monthly payment for this amount to the firm;
- the firm writes to your creditors and every month divides up your monthly payment between them.
So the end result is you make one payment per month to the firm and the firm handles everything else.
Commercial debt management firms provide exactly the same service as free firms except they charge you each month so less goes to your debts. Fee-charging DMPs are not “better” than the free DMPs in any way – and they will take longer to pay off your debts, so actually they are worse. See Choosing a Debt Management company for more details.
What can happen during a DMP
In 2016 more than a hundred DMP firms have closed after the regulator refused to authorise them or they decided to withdraw their application for authorisation. Find out what your options are if you are affected:
Debt management is flexible so if things don’t go well you have options, including changing your payments or stopping the DMP and choosing a different debt solution:
- What to do if a creditor doesn’t freeze interest.
- Having an annual review
- An emergency fund – getting a small emergency fund can help you get through problems.
- Help – my DMP payment is too high! your payment can be reduced.
- Is your house at risk? Charging Orders are rare and Orders for Sale are VERY rare – find out the facts.
- What to do if your DMP firm is closing in summer 2016
Debt management and credit ratings
- How a DMP affects your credit rating read this one if you are thinking of a DMP or are in the early stages.
- My DMP is ending – will my credit score improve? read this one if you are close to the end or have already finished your DMP as it has ways to speed up the clean-up process.
- What should the default date for a debt be?
- Can you get a mortgage in a DMP?
One of the good things about a DMP is the possibility of making settlements with your creditors if you get a bonus, inherit money, reclaim PPI, take money from your pension etc:
- Full and Final Settlements
- Will ending my DMP with partial settlement hurt my chances of getting a mortgage?
- Your pension and your DMP – your pension doesn’t have to be used to pay your debts, but it gives you an extra option.
- PPI claims when you are in a DMP – yes, you can make a PPI claim and it is a great idea!
Debt management news
- Debt Clever – trying to profit from closing down? (2016)
- Using a DMP to escape from the payday loan trap (2016)
- Secure Trust is closing its current accounts – these have been used by many people in DMPs, so find out what your new options are (2016)
- Why the FCA should ban the Compass debt management model (2016)
- The FCA and commercial debt managerment authorisation – the saga continues (2015)
- How good is your DMP? 5 things to check (2015)
- FCA says many DMPs are unsuitable and expensive (2014)