What is a Debt Management Plan (DMP) ?

A Debt Management Plan – often just called a DMP – is an arrangement with your creditors.

Your creditors are offered a payment each month which is lower than the normal payments to that debt but which you can afford, and asked to freeze interest and not add extra charges. They almost always do!

Most people prefer to use a debt management firm such as StepChange to set up the DMP and make the offers to your creditors. Then you pay StepChange the agreed amount each month and StepChange divide that up and pay your creditors.

What debts can go into a DMP

Most non-priority debts can go into a DMP, including credit cards, catalogues, BNPL, overdrafts and unsecured loans. Also most debts that have been sold to a debt collector.

If you have priority debts such as rent arrears, energy bills and council tax arrears, you need to get payments arrangements in place for these first. Then you can pay the rest of your debts through a DMP – they may only get low payments until you have repaid some of the priority debts.

Your DMP firm will explain all this.

Short-term “temporary” DMPs

Debt management is a great option if you expect your situation to improve soon. Some examples:

• it may take a few months to get a new job after redundancy;
• your children have left home so when your tenancy ends you will be moving to somewhere smaller;
• the car finance will finish in a few months, then you will have a lot more money each month to pay to your other debts.

It can also be a good option if you have priority debts such as council tax arrears or rent arrears. Here you make large payments to the priority debts and only small ones to your credit cards and loans – when the priority debts are gone, you can pay more to the other ones.

In these situations, it doesn’t matter if you can only pay £1 a month each of your debts – this is called a token payment Debt Management Plan.

A short-term DMP is like the umbrella in the picture above – it stops the man getting rained on – interest on your debt is frozen –  but it doesn’t solve his debt problem.

DMPs can be a good debt solution

Long term but flexible

A DMP is an informal arrangement. There is no long-term contract with your creditors for you to sign.

This makes it very flexible. If your circumstances change you can pay more or less to your debts, or switch to a different debt solution.

Your debts will be dropping each month as all your money is clearing the balance, not going on interest. Your debts drop faster if you go to a DMP firm that doesn’t charge fees, see below.

There will be an annual review with your DMP firm where you can talk about what has changed. Has your income gone up but your expenses have gone up more? That is very common with inflation in 2022. Then your DMP payments will be reduced.

Worried about how a DMP would work?

Many people worry more than they need to about debt management and delay too long.

Read Is the idea of a DMP scary? to see what the ten most common worries are, from Will my DMP be approved by my creditors? to Can I get a mortgage afterwards?

Then you can decide if they would be a problem in your case.

Too long? do you have a better alternative?

The biggest problem with DMPs is not the phone calls you may get at the start (they stop!) or the fact that creditors don’t have to freeze interest (most do!) – it’s how long they may take.

If your DMP will last a long time then you may have to cope with many things going wrong – job problems, the car or household goods have to be replaced, needing to move house, retiring, having a new baby, divorce etc.  Planning to pay a set amount for 8 or 10 years or longer may simply be unrealistic.

If you know your situation will get better in the next couple of years, then fine.

But otherwise, with a long DMP you should look at your other alternatives, such as a Debt Relief Order.

It can be hard to choose between debt solutions. Read Comparing debt solutions – that will help you make the best choice for you and your family.

Setting up a DMP

The main DMP providers

Some DMP firms don’t charge you anything at all so all your payments go to your creditors. StepChange, Payplan and Christians Against Poverty (CAP) are the largest fee-free DMP firms.

Talk to one of these firms. They will explain in detail how a DMP works, look at your income, expenditure and debts and suggest what you should pay each month.

You will be asked if you would like to be able to save a small amount every month. Say Yes to this – having a little bit put by will make getting through years much easier.

If the firm suggests that you look at a different debt solution, take this seriously and ask them to explain what the advantages of this would be.

If a firm agrees to set up a DMP for you, they will want you to confirm it in writing and they will explain the procedures.  For the first month or two, you may still get calls and letters from your creditors, but as the DMP settles down, most creditors will stop bothering you.

Never pay for a DMP!

Other companies charge you for operating a DMP – these advertise widely but you should not use one of these.

The DMPs that fee-charging firms set up are exactly the same as those from free DMP providers. paying a fee each month doesn’t get you better service – but it will mean that your DMP will last longer as less money is going to your creditors.

Or arrange your own Debt Management

You don’t have to get a firm to set up a DMP – you can do it yourself. by writing to each of your creditors saying that you cannot make the usual monthly payments because your circumstances have changed, offer them £x per month and ask them to freeze interest and charges. This is often called making arrangements to pay rather than a DMP, but there isn’t actually any difference!

Doing this yourself has many advantages if you feel confident writing letters as it leaves you in control of your finances and you can make changes if your income/expenses alter (although you shouldn’t be doing this every month!)

You don’t have to do all the work yourself if you use the free on-line CABmoney DMP service. Set up by a Citizens Advice Bureau, this can be used by anyone. You put in details of your debts and expenses/income, the system then calculates the offers you should make and produces the letters to send to your creditors.

Get a new bank account

If you have an overdraft, this needs to be included in your DMP – overdrafts are a very expensive sort of debt and you want those monthly charges stopped! Then the easiest way is to open an account with a different bank and switch to using that as your main bank account.

Even if you have a very poor credit rating you can still get a Basic Bank Account – these are pretty good!

You may like to look at one of the new sorts of banks such as Monzo and Starling, which have good apps that help you budget through the month.

Also if you owe other money to your bank – a loan or a credit card – it’s a very good idea to switch to using a new bank. Otherwise when the creditor gets the letter about the DMP, they may decide to help themselves to the money in your current account. This doesn’t often happen but it is a nightmare when it does. So get a new bank and be safe.

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