Financial Conduct Authority research has found that more than 600,000 Debt Management Plans are started each year and fees for debt management plans are estimated to be £25 million a year. Christopher Woolard, the FCA’s director of policy, risk and research says:
“It’s frankly unacceptable that … people who are struggling to make ends meet are being talked into unsuitable plans.”
How to avoid an unsuitable DMP
In a DMP, creditors are offered a lower monthly payment and asked to freeze interest. Their pros and cons and how they work are set out in this Guide to Debt Management. Some of them only last a few months – short term DMPs are great temporary solutions if your financial difficulties won’t last too long. Problems occur with longer term DMPs and here it is important to make the right choice.
If you are thinking of a long term DMP to help with your debts, or if you already have one, how do you tell if it is “unsuitable” or “too expensive”? There are three questions you need to look at:
- will my DMP last too long?
- how much are the fees?
- is my budget realistic?
Will the DMP last too long?
To find how long your DMP might last, divide your total debt by the amount that will be going to your creditors each month. For example:
Pete is paying £150 a month into a DMP and after fees, £120 is going to his creditors. His total debt is £12,000. So it will take 12,000/120 = 100 months, ie a bit over 8 years to pay off all his debts if all his creditors freeze interest.
It’s up to you to decide if this is an acceptable length of time. Debt Camel tends to use 7 years as a rough rule of thumb. But if Pete in the above example feels that 8 years is OK for him, that is fine. More than that though is a huge red flag – so much can change during that time that your DMP may simply become endless.
If there is little or no chance of all your debts being repaid by the DMP within a reasonable period, good debt advice (see below) encourages you to look at alternatives such as a Debt Relief Order, an IVA or Bankruptcy. But commercial Debt Management firms don’t make any money from DROs or bankruptcy, so they sometimes downplay the alternatives and push people towards an unsuitable DMP or an IVA instead.
What are the DMP fees?
If a DMP is a suitable option for you, it is important to check what fees you will be charged. Here there are three options:
- you can choose to run your own DMP and not pay any fees. National Debtline provides template pro-rata and token payment letters that you can use. Or there is a new on-line CAB service , where you can calculate pro-rate offers, generate letters and track progress.
- you can go to a Debt Management Company that doesn’t charge any fees. Stepchange is a charity and with a StepChange DMP, all your money goes to your creditors each month.
- you can go to a commercial Debt Management Company. Here the company will take its fees out of your monthly payment.
You may be so relieved at the idea of a DMP that you are happy to pay DMP fees each month. But these fees can really prolong a DMP. Take the example of Pete above. If all his £150 a month was going to his creditors, his DMP would only last 6 years, not 8. Commercial DMPs don’t offer any advantages over free ones and they are not more likely to persuade your creditors to freeze interest.
If you already have a DMP with a fee-charging company, you aren’t locked in and you can switch to run your own plan or use a non-fee charging company suck as StepChange or Payplan who are very used to people transferring DMPs to them.
Is the proposed budget realistic?
You need a budget you can live on for years, so you have to allow for clothes, car maintenance, an emergency fund etc, not just food and bills. This can be a difficult balance to get right – of course you want to clear your debts as soon as possible, but equally it isn’t reasonable to bring up your children in poverty for years. If you are talking to a Debt Management company that isn’t letting you have reasonable amounts, then walk away and get good debt advice elsewhere (see below). Otherwise you will be struggling and after a while your DMP may just collapse and you will have to start again.
Where to get good debt advice
If you are unsure if a DMP is a good way to tackle your debt, you need good debt advice from people who won’t make any money whatever you choose. Have a look around Debt Camel’s other pages! Two good options are CAB for face-to-face advice and National Debtline if you prefer telephone advice – contact details for these and other alternatives are here.
FCA regulation of Debt Management companies
The FCA is taking over regulating Consumer Credit from April 1st 2014, and this will include the regulation of Debt Management companies. It is promising a more robust approach than the previous OFT regulation. As part of the new rules the FCA is bringing in, all DMP firms will have to provide their potential customers with information about where they can get free debt advice.