Debt management is an informal arrangement with your creditors. You offer a lower payment, which you can afford, and ask them to freeze interest. Sometimes this is called a Debt Management Plan (DMP) – this is the same thing as “debt management”.
It’s called informal as there is no legal contract to sign. If your circumstances change you can pay more or less to your debts.
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 HP on your car will finish in a few months, then you will have a lot more money each month.
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 – it stops the man getting rained on (interest on your debt is frozen) but it doesn’t solve his debt problem.
Debt management can also be your long-term plan to clearing all your debts. This won’t work with a token payment DMP, but if you are paying a reasonable amount each month, your debts will be dropping as all your money is clearing the balance, not going on interest.
Many people worry more than they need to about starting debt management and delay too long. Read Is the idea of a DMP scary? to see what the common worries are and decide which if any of these really matter to you.
If you want to get a feel for what it’s like to have a DMP for a long while, read Living in a DMP – a survey which gives a range of opinions.
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 more years may simply be unrealistic.
If you know your situation will get better, fine. But otherwise, with a long DMP you should look at your other alternatives, see a Guide to DMPs which looks at these.
Pros gives you a breathing space to get your finances sorted out, hopefully stops your debts increasing with interest and charges being added
Cons may take a very long while, not all creditors may agree to freeze interest, won’t stop creditors contacting you or even taking court action, most creditors will report an agreed DMP as a default on your credit file
Debt Camel says Short term DMPs are good options, it’s the long-term ones that sometimes come unstuck.
Arrange your own Debt Management
You don’t have to get a firm to help you – you van write a letter 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.
Organising your DMP 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!) Also most DMP management companies require a minimum level of payments to be made and you may not be able to afford these.
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.
You will get some calls and letters when your creditors receive your DMP offer. To help you feel in control, be well organised: keep your letters to and from creditors in a file and make a note of phone calls. Be firm – just repeat that you have shown them your budget and you cannot afford any more than the £x a month you have offered. If they threaten to take you to court, they are probably bluffing, but it is possible. In this case, you use your budget to complete the Income and Expenditure details on the court form and make an offer of £x a month – exactly what you have already offered – normally the judge will accept this. Your creditors know this – that is why court action isn’t common.
If they threaten to take you to court, they are probably bluffing, but it is possible. In this case, you use your budget to complete the Income and Expenditure details on the court form and make an offer of £x a month – exactly what you have already offered – normally the judge will accept this. Your creditors know this – that is why court action, if you are making monthly payments, isn’t common.
A free DMP
You should contact StepChange or Payplan by phone or email and get a phone appointment at which your situation will be discussed. Have your Financial Summary and a list of your creditors in front of you during this phone call as this is the first thing they will want to explore with you. If they suggest you should consider another approach to dealing with your debts –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 well 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 regulator of Debt Management firms concluded:
the standard of advice provided by fee-charging debt management firms was of an unacceptably low standard.
The DMPs that fee-charging firms set up are exactly the same as those from free DMP providers and the DMP will last longer as less money is going to your creditors.
You may need to change banks
If you owe money to your bank, you must open a new one with a different bank and move your wages, direct debits and standing orders over – otherwise when the creditor gets the letter about the DMP, they may decide to help themselves to the money in your current account. Don’t think this can’t happen to you – it is a nightmare for those people it does happen to. Even if you have a very poor credit rating you can still get a new style Basic Bank Account and in January 2016 these improved, so they are pretty good!