A lot of people may be told this summer that their Debt Management firm is closing. If this happens to you, your reaction may be alarm – for many people their Debt Management Plan (DMP) rescued them from a difficult financial situation and they are very happy with the monthly payments they are making.
This article looks briefly at why these closures are happening, but concentrates on the practical implications for you – what your options are now.
Why can’t my DMP carry on?
All DMP firms had to apply to the new regulator, the Financial Conduct Authority (FCA), for “authorisation” at the start of 2015. Since then they have been operating with “interim permission” until full authorisation is gained.
Now, in May 2016, some firms are being told the FCA is “minded to refuse their application” – so it is likely they will have to close.
The FCA has found many problems at DMP firms, including people being given bad advice to start a DMP; administration errors such as not telling clients about what is happening with their debts or handling “client money” properly; and not conducting reviews during a DMP to see if it is still appropriate.
Is your DMP firm suggesting you transfer to another firm?
Most closing firms are behaving responsibly. But if your firm suggests that you should not be getting debt advice but should sign up for some legal services, possibly with a firm of solicitors or a firm that that is charging for legal template letters, you should be very wary. Look at all your other options, see below, before agreeing to pay anyone any more money.
You don’t need to worry that your creditors will immediately start hassling you if they don’t get their next month’s DMP payment. They know that there will be tens of thousands of people with a similar problem and that it’s not your fault.
Looking into your options may take a few weeks or more – this is time well spent to make the right decision. A good target would be to have made a decision and informed your creditors within a month or two.
Your instinct may be to sign up for another DMP immediately, but it’s good to step back and look at whether you have any better alternatives. You may not have had the different options properly explained by your old DMP firm at the start, or your situation may have changed, for example your debts have hopefully gone down!
A key fact is how long it will take to repay your debts at your old DMP payment level. If its less than 5 years, a DMP is probably your best bet. If it’s a lot longer, say 8+, you should be thinking if you have any quicker options. From 5-8 years, it’s your decision as to what you feel will work best for you.
Here are the common alternatives to just setting up a new DMP:
Start repaying your debts faster – at the beginning of your DMP you may have been paying all your could reasonably afford, but has your situation now improved a lot? Perhaps your family situation is different? Or your income? It may feel convenient to carry on paying a low amount to your creditors, but it’s good to clear the debts out of the way, especially if you might want to get a mortgage as being in a DMP makes it very difficult to get a mortgage even if your credit file is clean.
Are any of your debts really old? Not when you defaulted on them, but when you originally opened the account? If you have any loans, credit cards, store cards and catalogues that were opened before April 2007, then you should ask the current creditor (usually a debt collector) to produce the CCA agreement for the debt, because if they can’t, the debt is unenforceable in court and you can simply stop paying it. There is a template letter and more details in this National Debtline factsheet. It’s also worth doing this for ones that were opened q few years ago but aren’t so old, but this is less likely to work for the more recent debts.
A Debt Relief Order (DRO) – if you owe less than £20,000, are renting and have little spare income, this could be your best option. If your only income is benefits you will qualify. If you are paying less than about £100 a month to your DMP, have a look at a DRO – the DRO limit is only £50 a month, but the calculations are different, so you may be able to have a DRO even if you are paying more than £50 to a DMP. See Is a DRO better than a DMP? for a comparison.
An Individual Voluntary Arrangement (IVA) – this may work for you if you have a reliable income and assets to protect such as a house with equity. Without assets, it’s usually better to go for a DRO or bankruptcy. The big advantage of an IVA is at the end of 5 or 6 years, your debt is written off, rather than a very prolonged DMP. But this is a long, formal contract and about a quarter of IVAs just fail. You also need to think about the secured loan clause if you have a house, as this may be worrying for you. See How to choose between an IVA and a DMP for more information.
Bankruptcy – for many people with large debts bankruptcy is the fastest, cheapest and simplest way to be able to start again. From April 2016 this has become easier – there is no need to go to court and you can save up for the fees. Perhaps you should have gone bankrupt years ago when you started the DMP, but don’t let that stop you making the right choice now! See Long DMP vs bankruptcy? for more details.
Full & Final Settlements If you have been in a DMP for a while and can now get a lump sum this is worth looking at. You may have been able to save up some money if your situation has improved, you may have a new partner, you could reclaim PPI or get a payday loan refund, take money out of your pension (think hard before choosing this!)
Setting up a new DMP
If you do feel a new DMP is your best choice, then how should you set it up?
Now you have experience of a DMP, you may feel that you can could run your own and would prefer to be in control. Perhaps you don’t want to start discussing your finances again with a different firm. CABMoney is a free online facility from Citizens Advice that will generate letters to your creditors, income & expenditure sheets, calculate pro rate offers etc. It’s completely private and you don’t have to go to Citizens Advice for advice before using it – though if you are wondering if a DMP is right for you, that could be a good idea!
There are three major providers of free DMPs in Britain: StepChange, Payplan and Christians Against Poverty . If you go to one of these, your DMP will work in the same way as before – the new DMP firm will deal with your creditors and you just make one payment a month to the DMP. The only difference is that all your money will be going to your creditors with no fees deducted – so your DMP should end sooner.
You could also go to another commercial debt management firm – although I can’t think of a good reason to do this! See Choosing a Debt Management company where I’ve looked at this in detail.
Getting some help to decide
If you would like some help looking at whether a new DMP is your best option, check out my list of good places for debt advice to find one that will suit you best. Live in Scotland? Have business debts? Prefer face to face advice? Need help with benefits issues? There are a wide variety of places to go to get free and independent advice on your best alternatives.