A reader asked what a realistic monthly payment would be to a Debt Management Plan (DMP) covering £10,000 of debts. I think she was hoping for a simple answer, but there are three different aspects to consider and to be truly realistic a DMP has to tick all three boxes.
1) How much can you afford?
A realistic DMP payment has to be genuinely affordable – if it’s too large for you it simply won’t be sustainable.
Think about what a livable medium-long term budget is for your family so you can feel sure you can make these payments every month. It will take several years to pay off all your debts, so you need to allow for things that don’t crop up every year, such as dentist’s charges and new tyres for the car. Don’t forget that when you in a DMP you won’t be able to borrow more money if something unexpected happens.
It’s not easy to get the balance right here. Most people can make some savings, perhaps reducing their grocery expenditure by more advance meal planning, and this approach is a good way to sort out your debts as fast as possible. But if you are plan to spend nothing on clothes and entertainment, your DMP may only last a few months before it collapses, see How Far Should You Cut Back?
One way to make a DMP easier to manage is to save a small amount each month for an emergency fund. This may seem like it’s going to make your DMP longer as you will be paying less to it, but it can make the journey a lot smoother, helping to stop a nasty surprise becoming a crisis.
2) Will your creditors freeze interest?
If your DMP payment is too low, your creditors may not agree to freeze interest and charges. If it’s just one lender that may not matter too much, but if it’s several, then adding interest can sometimes make a DMP unworkable.
Here “too low” isn’t a simple percentage of the debt, it depends on what the creditor thinks you can reasonably afford. If you have just lost your job and are living on benefits, this may only be a token £1 a month, but your creditors will still usually freeze interest – see Making token payments for details!
People often worry needlessly about this problem – most creditors do stop adding interest and charges if they are shown a “sensible” income and expenditure statement. If you are using a firm to set up your DMP, they also check that none of your expenditures will look too high to a creditor.
3) How long will the DMP last?
Many people overlook this one! A realistic DMP is one that will clear your debts in a reasonable length of time.
Of course this doesn’t matter if you know the DMP will only be temporary, until you find a new job say, or your childcare costs fall. Here a DMP is a good debt option not because it will pay off your debts, but because it gives you some time to sort your finances out.
But if you aren’t expecting a big improvement soon (that lottery ticket doesn’t count…) do a simple sum. If you are paying £90 a month, your £10,000 debt will take more than 9 years to finish even if all your creditors freeze interest. That’s a long while, I would say definitely too long. During that time you may need to replace your car and the washing machine, your kids will turn into expensive teenagers, you may retire and see your income fall etc etc. If you have to reduce your DMP payment, it may become never-ending.
If you are using a fee-charging DMP company, you could speed up your repayments by switching to StepChange or Payplan. They don’t charge you any fees so all your monthly payment goes to your creditors. How much difference would this make for you?
Alternatives to an unrealistic DMP
If your DMP isn’t going to pass all three of these tests, there may not be a “realistic” DMP payment at all. Too large and you can’t afford it, too low and the DMP will take too long.
There may not be any nice alternatives, but it’s worthwhile looking at all your possible options rather than waste years in a DMP and not making much progress paying off your debts:
- if you meet the criteria for a Debt Relief Order (DRO) that will often be a much better option than a DMP;
- if you rent or have little or no equity in your house, look at DMP or bankruptcy?
- if you have a house with equity and a secure income, check out DMP or an IVA?
- the ultimate tough decision – sell the house.
If you are unsure whether a DMP is a realistic debt solution for you, it could help to talk your options through with someone impartial, that won’t make money whatever you choose such as Citizens Advice if you prefer face-to-face advice, or National Debtline for phone advice.