A reader asked if it is OK to reduce your debt management payments when you need to?
This is a common problem for people in Debt Management Plans (DMPs) in 2017:
- inflation is at a four year high, fueled by the weakness of the pound after the Brexit vote, which increased the price of imports;
- Britain is in the grip of a pay squeeze, heading for the worst decade of income growth for over 200 years; and
- benefits freezes and cuts have affected millions, especially families with children.
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 the set monthly payment?
The reader was asking about StepChange, the biggest debt management company, but exactly the same applies to all of them.
Good news – DMPs are flexible
DMPs aren’t formal legal contracts and it’s usually possible to get them changed. 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 expenses have recently risen (eg train season ticket, council tax and water bills) then you need your DMP payments reduced now, you can’t wait until your next annual review. 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, rather than using a DMP firm, you write to all your creditors, say you need to reduce your monthly payments and enclose a new Income / Expenditure sheet showing how the new proposed monthly payment has been calculated. If there is a clear reason for this (for example “my hours have been reduced” or “my utility bills have increased a lot”), then mention this in your letter.
If you have a good reason to reduce your payments and your Income/Expenditure sheet shows this, then most creditors will understand what you are doing. A creditor who has already agreed to your DMP and frozen interest isn’t likely 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 it might. 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 years…
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 £20,000 and don’t have a house, then a Debt Relief Order (DRO) might work for you.
If 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 a quarter 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.