If you want a debt management plan (DMP), where your creditors are asked to freeze interest and accept a lower monthly payment, which debt management firm should you use?
This article looks at the things to consider. It is a big decision as you are going to have to deal with this company – including discussing the details of your personal expenses and income – for several years. Pick the right DMP firm and it feels like you have an expert on your side.
So should you use a fee-charging firm or a “free” one?
All DMP firms have the same basic approach:
- you make a single monthly payment to the DMP firm;
- the payment will be the same size whichever firm you use, because they all use the same guidelines from the regulators.
- the DMP firm then distributes the money to your creditors;
- a fee-charging firm takes its fee out first, so your creditors get less;
- a “free” DMP firm doesn’t, so all your money goes towards your debts.
I’ve been talking to debt advisers and people in DMPs about why some people choose to pay fees.
The issue reminds me of listening to Brits and Americans discuss health care – both sides have very strongly held views! I thought it would be interesting to use this as a comparison.
Do you get a better service if you pay fees?
For healthcare, you may well get a smarter waiting room, a private room in the hospital, better food etc. None of that is very relevant for DMPs.
Sometimes you can “jump the queue” by going private, getting an operation or other treatment faster. The equivalent for a DMP would be having your debts paid off sooner. But if you are paying fees for a DMP, less of your monthly payments are going to your creditors, so a fee-paying DMP takes longer than one from a free DMP company.
The only way that a fee-charging DMP could finish sooner than a free one is if the fee-charging company was better at getting interest frozen on your debts. I haven’t seen any evidence to suggest this is the case. Most creditors agree to freeze interest in a DMP whatever company is running the plan for you.
You may sometimes get extra treatment options if you go private with a health problem. In contrast, with debts you are likely to get a wider choice of alternative debt solutions if you go to a free firm – for example, you could have a Debt Relief Order set up. Very few commercial firms help with DROs because they wouldn’t make any money out of them.
What about the success rate? This is a hard question to answer for DMPs. There aren’t any statistics published for DMPs – you can’t even find out how many are set up by a firm each year, let alone how many finish! It’s not even clear what statistics would be helpful, see How many DMPs succeed and how many fail?
When doctors and surgeons are asked about their “success rates”, these can be hard to measure because some doctors take on the harder cases where you would expect less good outcomes. The same applies for DMPs. You will see a much higher percentage of clients with benefits problems and things like rent arrears in a free DMP firm than in a commercial one.
That doesn’t mean the free firms aren’t good at handling “easy” DMPs, it just means commercial companies don’t want to touch the difficult cases because they wouldn’t make money from them.
Worries about free services
Some people in debt choose a fee-charging DMP firm because they are suspicious about free services, suggesting various possible problems.
To people working in the free sector – as I am – these perceptions often simply seem wrong.
Here are some things I have heard said:
- “it’s better to speak to expert professionals, not volunteers”
This is a misunderstanding. The two biggest free DMP providers, StepChange and Payplan don’t have any volunteers at all. Speak to them and you are always dealing with professional debt advisers.
- “free DMP companies are funded by the banks”
Most free DMP companies get most of their income from “fair share” arrangements which are paid by the creditors. But this doesn’t make a difference to what you would pay each month. And it doesn’t affect the advice you are given.
The commercial companies don’t let you pay less each month, they have to put forward the same monthly offer that a free DMP would – otherwise the creditors would refuse to freeze interest.
- “Someone I pay will work in my best interest”
So you would rather trust a fee charger that gets a lot of their business by buying names from cold-callers and whose staff may get a commission from signing you up for a DMP than a charity that will advise you if you have better options than a DMP and can help you with those?
Which firm is really working in your best interest and which just wants your money?
- “free isn’t possible, there must be hidden charges”
This is simply wrong – there aren’t any hidden charges for you.
- “if you are paying someone, they will be on your side and not be judgmental”
Wrong. Well hopefully the commercial firms are on your side, but so are the free DMP firms!
- “I want my information kept completely confidential”
Of course – and that is exactly how it will be handled by a free DMP firm. All debt management companies, free or charging, supply your creditors with a summary of your income & expenditure. But apart from this, the free DMP companies are not going to tell the taxman, the DWP, your creditors, your employer, your partner or anyone else anything about your affairs.
- “a commercial firm will deal with everything; with a free one you get some help but you still have to do the work”
Another misunderstanding. A free DMP works in exactly the same way as one you pay for: the DMP firm deals with your creditors and you just make one monthly payment to the DMP firm.
Most people don’t make an active choice
Most people can’t name one debt management firm, and very few will be able to name two or more. People are usually choosing a DMP firm at a point in their lives when they are under pressure from creditors and feeling very stressed. Unsurprisingly, most sign up to the first firm they come across that promises to make their financial pain stop, to halt the letters and phone calls from creditors and worries about court and bailiffs.
Some creditors will signpost to one of the free firms. Other people will ask friends or come across advertising. And commercial firms spend more on advertising than free DMP firms.
To suggest that many people “choose” a particular DMP firm doesn’t seem accurate. The word “choice” suggests that there were at least two alternatives and there was a reason to go with one of them, not that someone signed up with the first firm they talked to without considering anything else.
Who should YOU choose?
Most people are happy with their choice of debt management company and often are very grateful to it for helping them out of their debt problems. I don’t care if I could have got it cheaper, it has worked well for me is a pretty common reaction.
But if you are about to choose a DMP firm, or if you have to change DMP firms because your old firm is being closed down, then why wouldn’t you go for a free one. Because your DMP will end sooner with a free DMP firm as all your money every month goes to pay off your debts.
There are no advantages to paying fees and no downsides to free… So I suggest:
- look at how DMPs compare to the alternatives;
- look at my list of good places for debt advice and then talk to one of them about a DMP.
And if you are in a DMP that is charging you fees, switch your DMP to StepChange who don’t! Or if your DMP is with Gregory Pennington, complain and ask them to stop, as GP has already stopped charging fees for new DMPs.