A reader asked if it is OK to reduce your debt management payments when you need to?
In 2023, with prices still rising fast, this is a common problem in Debt Management Plans (DMPs). Sometimes your income falls. Often your essential expenses go up faster than your pay does.
In debt management, you pay a set amount to the DMP company and they divide it between your creditors. So what happens if you can no longer afford that monthly payment?
There is good news – DMPs aren’t formal legal contracts and it’s a lot easier to get them changed than if you are in an IVA.
Ask for a review if you need one
The DMP firm will usually review your DMP annually to see if it needs to be adjusted. But if there is a big change during the year, or a lot of small ones that add up to a lot, phone up and ask for a review.
Some problems may be temporary – perhaps you have had an unexpected expense such as car repairs. That could mean just missing a couple of months payments, then getting back to normal.
But if there is going to be a big drop in your income, such as your partner going on maternity leave, or a lot of your expenses have recently risen and your pay hasn’t, you need your DMP payments reduced now, you can’t wait.
For many people, the cost of living problems since 2022 have been a nightmare. And if you face a large mortgage or rent increase in 2024 it could get worse.
So tell your DMP firm why you are having problems and ask for a review now.
It’s important to set your DMP payment at a level you can manage. If your income has become more erratic, talk to your DMP firm about how this can be done.
The not-so-good news – your DMP will take longer
Although you can reduce the amount you pay, this is a sign that your DMP is not going as well as you had hoped and it will take longer until your debts are cleared.
So it’s worthwhile pausing and thinking about whether you can improve it. Or if it still suitable.
Have a general review of your finances – what changes are likely to your expenditure or income in the next few years?
Some may be good, such as childcare costs reducing. Others could be difficult, perhaps your car isn’t going to last much longer. Or retirement may be coming up before your DMP ends.
When you started your DMP it may have felt like the answer to your prayers, with no more worry about your creditors. But now you know how it’s going and the things that can change, it’s worth having a hard look at whether you have any better options.
You might have been happy with the original DMP which was going to take six years … but now it is going to take ten more years…
Do you have a better option?
If you are using a debt management company that is charging you a fee each month, look at switching to a free DMP provider such as StepChange. Their DMPs work in exactly the same way as your current one, except all your money goes to your creditors so the DMP will end sooner.
If you owe less than £30,000 and don’t have a house, then a Debt Relief Order (DRO) might work for you. The DRO rules were relaxed in 2021, so more people can now have a DRO.
As a result many people on DMPs should think about switching to a DRO.
When a DRO won’t work for you, look at other ways of clearing your debts – selling your house if it has equity or is costing too much; bankruptcy or an IVA.
Any ways to speed up your DMP?
Also think about whether you may be able to win any affordability complaints:
- were you in an overdraft not just for a few days at the end of the month but for most or all days?
- did a credit card or catalogue increase your limit too high when you were only making minimum payments?
- were the repayments on a loan so large that you were left short of money and had to borrow elsewhere?
- did car finance cause you big problems with your other debts?
See my articles about affordability complaints which look in detail at these situations, There are separate articles for different sorts of debt, each with a template letter you can use to complain.
Winning an affordability complaint may mean your balance is reduced, which will speed up your DMP. And as a nice side effect you may get your credit record cleaned.
Answering the question
So the answer to the reader’s question is Yes, you can reduce the amount you pay to a DMP, they are flexible. Talk to your DMP firm and say why you need a review.
But reducing your payments means your DMP will last longer. If you are sure your new payments will be sustainable and the DMP isn’t going to take too long, fine. But if you feel the end of your DMP is a goal that is always moving further away, you should look at alternatives and ways to speed it up.