Most people use a firm to run their Debt Management Plan (DMP). In this case you make one monthly payment to the firm, who then divides it between your creditors. This is free if you go to StepChange, Payplan or CAP – other firms do exactly the same but charge you a fee each month.
But you can do all this yourself, not using a DMP firm. The advantages of this are:
- you are in control;
- you don’t have to explain your finances to a DMP firm every year;
- you can repay money to someone in your family, just treat them as another creditor. Some DMP firms don’t like you doing this;
- you can make a settlement offer to one of your creditors easily if you get some spare money.
But would this be difficult? A lot of work? Would you get a lot of hassle from creditors?
This article suggests you should use the free CABmoney site. This does most of the work for you!
Setting up a DMP
Most of the work is done in the first couple of months of a DMP, after that it’s easy and you get very few letters.
You can’t include priority debts such as mortgage, rent or council tax arrears, electricity and gas bills, car finance etc in a DMP. You have to make arrangements with them first, until this is done you don’t know how much money you will have left to pay the less important debts such as credit cards and loans. If you aren’t sure about this, talk to National Debtline and they will explain and offer advice on your priority debts.
Once any priority debts are under control with payment arrangements in place, you need to:
- get a list of all the debts you are going to have in your DMP. This should normally be all your non-priority debts. It’s not a good idea to leave some debts out and carry on paying them in full – the creditors in your DMP won’t think it’s fair that they are getting less.
- create a Financial Statement with your income and expenditure (I&E) – this shows how much “spare money” you have each month after you have paid all your expenses and bills;
- divide this spare money between your debts on a “pro rata” basis, so the biggest debts get more money than the smaller ones do;
- write to your creditors offering these calculated amounts and ask them to freeze interest and charges. National Debtline has sample letters to make these offers;
- stop your regular payments to your credit cards, catalogues and loans – for example cancel any DDs or CPAs with your bank – and set up standing orders to pay the lower amounts each month.
If you owe any money to your bank – because you have an overdraft or a credit card say – you should change your bank account to one you don’t owe any money to. The overdraft with your old bank is just one more debt in your DMP.
Using CABMoney makes this easier!
CABmoney helps you run your own DMP by:
- helping you to create a budget, converting weekly amounts to monthly. It also warns you when amounts look lower or higher than normal;
- generating a Financial Statement for you, in a format that creditors will accept;
- calculating the pro-rata sharing of your surplus money between your creditors – these may be token offers of £1 or £5 a month if your surplus is low;
- generating the letters to your creditors with your offer and a copy of the Finacial Statement, including automatically importing their
- letting you record creditors replies.
You can get an overview of how this works by looking at the sample CABmoney DMP here.
CABmoney was created by a Citizens Advice in Derbyshire. But it’s free for you to use wherever you live in the UK.
What will your creditors say?
You will get letters and phone calls because you have stopped the normal payments – most of these are because they haven’t yet processed your offer letter. You can ignore them for a few weeks or reply saying you can’t afford the normal payments and you have already made them a lower offer on dd/mm/yy.
The more creditors you have, the more work this will be. Some creditors are more difficult than others, but many are surprisingly easy, including payday lenders.
Creditors aren’t allowed to say they won’t deal with you, you have to use a DMP firm. Nor that they will only freeze interest if you use a DMP firm.
Guarantor lenders are usually very difficult. If you include a guarantor loan in your DMP, the lender is very likely to ask your guarantor to pay the rest of the monthly payment. If you don’t want this to happen, you have to leave the guarantor loan out of your DMP and pay them in full, which means your other creditors will get a lot less. Read How a borrower can complain about a guarantor loan as that is a possible way out of this problem for you – if you win an affordability complaint, you can then safely put the guarantor loan in your DMP.
Running a DMP
After the first few months, it’s easy to run your DMP. The payments just leave your bank account each month!
Probably the largest chunk of work isn’t actually to do with the DMP itself, it’s the effort needed to keep within a budget – this has to be done whether you are running your own DMP or using a firm.
Some common things that happen are:
- a creditor will sell your debt to a debt collector. Debt collectors are often easier to deal with than the original creditor so this is good news. In this case you cancel the standing order to the old creditor and send the new one a Statement of Affairs together with your offer and ask for their bank details so you can set up a new standing order.
- a few creditors may want to review your DMP every six months or a year, especially at the start. If your situation hasn’t changed, then you just reply to their letter with one saying that there has been no change and enclosing a new version of your Statement of Affairs.
If your income or expenses change a lot, you may need to revise your DMP offers downward if you are finding it difficult to manage. You don’t want to be changing the amounts every month though. You want a number you can manage to pay every month without a problem.
If your income has increased, you have three choices:
- increase your DMP payments
- save up the extra in an emergency fund. If this gets large, you may be able to use it to make a full & final settlement offer to one or more of your debts.
- spend the extra, especially if your bills have also increased.
A creditor may take you to court for a CCJ but this is rare. Creditors are much more likely to do this with debts where the client isn’t talking to them than where the client has proposed a monthly payment and backed it up with a Statement of Affairs. It is just as likely to happen if you are running your own DMP as if you are using a firm to do it.
What if you already have a DMP with a firm?
If you already have a DMP, you can stop using that firm and switch to doing it yourself. This is easy because all your creditors already know you are in a DMP, so you aren’t going to get hassled at the start by creditors hoping to be paid in full.
To switch, you need a full list of your creditors from your DMP firm and you need to give the DMP firm notice that you are ending your DMP and will be cancelling your monthly payment.
You then need to write to each creditor, ask them to confirm the current balance you owe and the details of the account you should be making a payment to each month. Your DMP firm should be able to give you a list, but it’s good to check this is accurate! Also think if there are any other debts that should really be included in your DMP – this is the time to do that.
Then when you have a complete list of your creditors and balances, the CABMoney system will calculate all the pro rata offers for you. After that, you just set up a standing order to pay each creditor the calculated amount.
Running your own DMP does involve some extra work. If you only have a few creditors and they are high street banks and credit cards, then it won’t be a lot, especially after the first couple of months.
But if you have loads of creditors or many of them may be “difficult” or you are very nervous, then you may decide that you want the moral support and hand-holding from a DMP firm. Phone StepChange!