Are your debts are large but it is the interest being added that is the real killer? If this sounds like you, debt management could be a good way forward.
In debt management, your creditors are offered a monthly payment you can afford and asked to freeze interest. Because the interest is frozen (almost all creditors agree!) your debts start dropping a lot faster. You don’t have to sign a legal contract. That makes these a perfect option if your situation is likely to change over the next few years.
Sometimes you talk to your creditors, sometimes you ask a firm to do it for you, some firms charge you a fee, some firms don’t… but these are all type of debt management. If a firm is doing this they will probably call it a Debt Management Plan (DMP).
For a good intro, read What is a DMP? That looks at all the basics, including who they are most suitable for.
Then this Guide to DMPs provides more detailed information. The aim is to let you:
- decide if debt management is suitable for you and your family;
- think if you would like to self-manage or use a debt management company; and
- look at what can happen during 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. Try to pay too much and you won’t be able to manage it; 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 a nother job, you can pay as little as 31 a month to a debt
- What is a realistic payment for a £10,000 DMP? I often get asked this sort of thing!
- Would I have to sell my car in a DMP?
- Using disability benefits to pay a DMP
Do you have a better alternative?
Look at how long you are likely to be in debt management. You can 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.
Of course your DMP could end up being longer, if things don’t go well, or shorter if your finances improve. Which is more likely?
If your DMP may only last a couple of years, have a think about whether it is really needed, 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.
Are you worried about a DMP?
You may have lots of concerns about starting debt mangement. Are you worried about a DMP? looks at the some of these, including whether interest will be frozen, if you will get lots of calls from creditors and how it will affect your partner.
Debt management is often a very good choice if your problems are going to be temporary.
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 Living in a DMP – what is it really like?
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.
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 ;
- 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 send.
If you are worried this will be too complicated or take too much time, read How much work is it to run your own DMP?
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;
- if the firm suggest 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 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 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 closed after the regulator refused to authorise them or they decided to withdraw from the busienss. 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.
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 management authorisation – the saga continues (2015)
- FCA says many DMPs are unsuitable and expensive (2014)