Debt Management – answering your questions about DMPs

Are your debts are large but it is the interest being added that is the real killer?  So you are running to stay still?

Debt management could be right for you!

This is also called a Debt Management Plan (DMP) or Making an arrangement with a creditor. They are all types of debt management.

How debt management works:

• your creditors get a lower monthly payment you can afford;
• most creditors stop adding interest and charges, so your debts start dropping a lot faster
• sometimes you talk to your creditors and pay them, sometimes you make one payment a month to a firm that deals with your creditors.

To start with What is a DMP? gives an overview. Then this article is a more in-depth Guide to DMPs, so you can decide if debt management is right for you and your family and see what happens in a DMP.

How much will you pay each month?

This is a key question:

• How much should you cut back? Getting the balance here is important.  Pay too much and you won’t be able to keep up the payments. Pay too little and your DMP may never end.
• Offering a token payment to a debt If things are very bad now but may get better, for example when you find another job, you can pay as little as £1 a month to a debt. The DMP won’t last forever because you can later increase this £1.
• Using disability benefits to pay a DMP

Remember that DMPs don’t tie you into a long-term formal contract. As your life changes, you can pay more or less. In general, it’s a good idea to pay as much as you can afford so the DMP ends sooner and life gets back to normal.

Also DMPs don’t affect your assets. No-one will make you sell your car or your investments or your house. Of course it’s often a good idea to sell any investments to pay off your debts – but it’s up to you to take that decision.

Do you have a better alternative?

You may have lots of concerns about starting debt management, including whether interest will be frozen, if you will get lots of calls from creditors and how it will affect your partner.

Read The main worries people have about debt management for a detailed look at all of these. Many of them aren’t problems at for most people!

Is your house at risk? Once you are in a DMP, Charging Orders are rare and Orders for Sale are VERY rare – find out the facts so you don’t worry about this!

Debt management is often a very good choice for temporary problems. You don’t have to sign a legal contract. That makes a DMP a perfect option if your situation will improve over the next year or two – don’t worry too much about it!

But if you aren’t expecting a big improvement soon, look at how long you may be in debt management. Make a good guess by assuming your creditors 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.

Your DMP could end up being longer, if things don’t go well, or shorter if your finances improve. Which is more likely? This does

This does involve guessing what may happen, but sometimes you have a pretty good idea eg if your childcare costs will drop, or you will be going on maternity leave (great news… but not for your finances!) or kids will get to over 18 so you will lose benefits, etc.

Here is a calculator that lets you put in how much you will pay at the start, make a guess at what this may change to later and see how that affects how long your DMP will be.

If your DMP may only last a couple of years, have a think about whether it is really needed. freezing interest may sound great but DMPs do affect your credit rating, so they are best avoided unless you need one. See Can you manage without a DMP? 

If your DMP sounds too long then one of the other debt solutions may be better, so look at these detailed comparisons:

• A long DMP or bankruptcy 
• DMP or an IVA 
• a Debt Relief Order  a DRO could be your best option if you are renting and your debts are less than £20,000.

You don’t have to rush into a decision, but if your debts are getting larger every month, then don’t delay – or you will just have a bigger problem to solve.

How to set up a DMP

There are two options – you can do this yourself or you can use a DMP firm.

Set up your own DMP

Many people like this – it helps them feel in control and they don’t want to explain their finances to a DMP firm or to have annual reviews. It is surprisingly easy.

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. This is often called making payment arrangments.

When you have more creditors, you can set up a DMP yourself. Read Running your own DMP which explains what to do and how the free CABmoney facility from Citizens Advice can help with this by doing the calculations and generating the letters.

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;
• If the firm suggests you have any debt options which look better than a DMP – take these seriously!
• you agree on a monthly payment with the firm – this isn’t fixed, but make sure you think it’s 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 you make one payment per month to the firm and the firm handles everything else.

Commercial debt management firms do exactly the same as free firms – except they charge you a fee 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 really they are worse. See Choosing a Debt Management company for more details.

There are three major providers of free DMPs in Britain: StepChange, Payplan and CAP. If you go to one of these, all your monthly payment goes to pay off your debts.

What happens during a DMP?

In the first year

You may continue to get letters and calls for a month or two at the start. These do stop! Keep telling them you are in a DMP and don’t agree to pay them any more money.

If you get a letter saying your debt has been sold to a debt collector, this doesn’t change your DMP at all. Tell your DMP firm and they will switch to paying the new debt collector instead.

It will make your life less stressful if you can build up a small pot of savings. Have a look at apps that can help you save “without noticing”, see Chip and Plum for details.

After a few months, check to see if all your creditors have frozen interest. Most do! Many people will find all their creditors have. But if you have one or two creditors that haven’t, read What to do if a creditor doesn’t freeze interest. You can complain. This isn’t guaranteed to work but it’s well worth trying!

Your DMP should be reviewed at least once a year, see Having an annual DMP review for details.

Debt management & 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?

What if things aren’t going well?

If you are struggling, talk to your DMP firm, don’t wait for your annual review.

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:

• Can your DMP monthly payment be reduced if you are struggling? 
• also look at other options such as a Debt Relief Order. Your DMP firm will be able to tell you if you should think about switching to a different debt solution.

Don’t borrow more money to try to get by – on a DMP you will find it very difficult to be able to repay new debts.

If your DMP has been going for years, has a lot longer to go and your debts have been sold to a debt collector, read When to ask for a CCA agreement? and think if that may help. The older your debts are the more likely it is to work.

If things go well – making settlements with your creditors

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!
• What happens if you inherit money? The good news is that you can choose what to do with the money, but of course clearing debts is usually a good idea.