A reader asked if it is OK to reduce your debt management payments when you need to?
In 2022, with prices rising fast, this is going to be a common problem in Debt Management Plans (DMPs). Sometimes your income falls. Sometimes your expenses go up faster than your pay does.
These money troubles hit people with large debts particularly hard. Debt management firms and IVA companies are reporting that disposable income – the amount of money someone has left to pay to non-priority debts – is falling.
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?
Good news – DMPs are flexible
DMPs aren’t formal legal contracts and it’s a lot easier to get them changed than if you are in an IVA.
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 adding up to a lot, you can 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, April 2022 will bring a clutch of biog price rises all at the same time: energy bill may go up a frightening amount, council tax, National Insurance etc
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.
Running your own DMP?
If you are dealing with your creditors yourself, write to all your creditors and say you need to reduce your monthly payments and why. You could say for example my hours have been reduced or my energy bills and petrol costs have increased a lot.
Enclose a new Income/Expenditure sheet showing how your new proposed monthly payment has been calculated.
When you have a good reason to reduce your payments most creditors will understand what you are doing.
This may feel scary but a creditor who has already agreed to your DMP and frozen interest isn’t going to change their mind just because you have even less money.
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 have a hard look at whether you have any better options.
You might have been happy with the original DMP that 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.
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.
But be careful of an IVA, if you can’t afford your IVA payments, the IVA may well fail, more than 30% of them do.
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.
Linda says
Hi Sara I don’t know if this the correct place to post apologies if it isn’t. I just wondered I put a claim in for new style contribution based JSA a few weeks ago and just wondered what the average wait is? It’s normally 2 weeks but completely understand it’s going to take longer I just wondered if anyone knew how long the delays might be as can’t find any guidance on their web pages other than they’ll write to me. My partner has been furloughed so would be helpful to know when this will start to come in as it will help. I have a Stepchange DMP.
Sara (Debt Camel) says
Sorry, I don’t have any current information on that.
Have you asked StepChange to suspend DMP payments?
Linda says
No not as yet I was a bit nervous too in case they stopped my plan all together I’ve kept up to date so far but don’t know if their policy has changed
Sara (Debt Camel) says
StepChange will be helpful about this. See https://www.stepchange.org/debt-info/coronavirus-advice-for-clients.aspx. I should do this now.
Does your partner have debts he now can’t pay?
Linda says
He’s on a low income anyway so going down to 80% was a sting. It’ll be his first month this month. His main worry is his monthly car payment which is well over £200 with money barn it’s up to date at the moment but it’ll be a struggle if I’m honest
Sara (Debt Camel) says
ok so he can ask for a 3 month payment break with his car finance, see https://debtcamel.co.uk/car-finance-payment-breaks-coronavirus/. Interest is charged though, so if he could afford to pay some of it each month that would minimise the extra?