A reader said she was scared about starting a Debt Management Plan (DMP). Her worries were that her husband’s credit rating would be affected and that she would get lots of phone calls from creditors.
A DMP is supposed to help with your debt problems, not increase them, so I thought it would be useful to look at the common concerns people have before they start DMPs.
It doesn’t make any difference if you go to a free DMP firm or one that charges you, they all work in exactly the same way.
DMPs are good debt options if the future is very uncertain
With many people uncertain how their finances will look in 6 months or a year because of Coronavirus, a DMP can be a good holding option.
If things don’t go well you can reduce your DMP payment or switch to some form of insolvency. If things improve you can increase your DMP payments or even end the DMP and go back to normal debt repayments.
So a DMP can give you a breathing space, with less stress and pressure from your creditors and the knowledge that your debts are not getting worse as interest isn’t being added.
Will I get lots of phone calls from creditors?
You need to stop making your usual payments to your creditors when a DMP is being set up. This sounds scary – aren’t you going to get a lot of phone calls?
You will get some contact in the first month or two. You may be phoned or get texts/emails/letters asking why you haven’t paid them last month and would you like to pay right now? The creditor may say they can’t see a record of your DMP.
Just tell them you can’t afford the payments, that your DMP firm will be writing to them and they will be making all payments from here on.
Don’t make a payment yourself! This complicates things and delays moving on to “the new normal” where your DMP firm pays and you don’t.
The phone calls really do stop! There are hundreds of thousands of people in Britain happily in DMPs – and they wouldn’t be happy if creditors kept ringing them.
Will my DMP be approved by my creditors?
A DMP can’t be vetoed by one or two creditors, there isn’t a formal vote on it.
Your DMP firm will send each of your creditors your income & expenditure sheet. This shows that you don’t have any spare money to pay them more.
It’s up to each creditor to decide whether to accept the offered monthly payment. But if they say it’s too low, don’t offer them more. Talk to your DMP firm if you are very worried but this normally gets resolved pretty quickly.
Will interest be frozen on all my debts?
Most creditors when shown an Income and Expenditure statement do agree to not add more interest and charges.
The proof of this is the very large number of DMPs that are running – people would soon get fed up if lots of interest was still being added!
Sometimes a creditor will say they can’t do this until you haven’t made the normal monthly payments for a few months. This is annoying, but it will soon be sorted.
If a creditor is still adding interest after a while, you can write to them and ask them to stop – there are template letters here. And you can complain to the Financial Ombudsman if they don’t. but at the start of your DMP there is no reason to expect this will be a problem.
Will my debt be sold to a debt collector?
Possibly. And the longer your DMP goes on, the more likely this is.
But this doesn’t really matter:
- your DMP firm will just start paying the debt collector instead;
- if interest wasn’t frozen before, it normally is by the debt collector; and
- if later you want to offer a full and final settlement, this is often easier with a debt collector!
So this isn’t something to worry about at all. It’s admin hassle for your DMP firm, not for you.
Will I get CCJs?
A creditor can go to court and get a CCJ even if you keep paying the monthly DMP payment.
But this is pretty rare. The court often sets your CCJ payment at the same level that your DMP payments is … so the creditor doesn’t really gain from this.
The people that are usually taken to court for a CCJ are the ones that aren’t making any payments to their debts. Not the ones who are doing their best by setting up a DMP.
It’s very unusual at the start of a DMP for typical consumer debts such as credit cards, catalogues and loans.
The only common exception here is guarantor loans, where the lenders often seem to go to court – here look if you can make a complaint about the guarantor loan if you are the borrower or if you are the guarantor.
A CCJ is more likely if you have “business” debts, for example if you have given a personal guarantee. Talk to your DMP firm if you are worried about this.
If you are worried about charging orders, they are VERY rare, see Is my house safe? for statistics.
I’m not sure I can afford that DMP payment
A DMP is a big change for you. Before you had lots of debts to pay but also credit cards and an overdraft to use. In the DMP you are living on your income each month without borrowing and you only have to make a single debt management payment.
Some people find a DMP very restrictive but many people in practice don’t. Some people find they actually have more money to spend without all the debts being paid first.
And if you have been juggling debt repayments for a long while it is likely to come as huge relief to stop and not be anxious about letters from debt collectors.
If you feel the DMP payment proposed is too high because you have specific costs that aren’t included – perhaps someone in your house has a disability – you need to talk to the firm about these.
Self-employment with a fluctuating income can be difficult, talk to Business Debtline about this situation.
DMPs are flexible, so if you have a temporary problem you can ask for your monthly payments to be suspended or reduced.
I would like to keep my overdraft outside my DMP
This is a very bad idea. Including your overdraft in your debt management plan means that the charges will stop.
Yes you need to switch to a new bank account, but since 2016 the major banks all offer good basic bank accounts to people with poor credit records.
If you aren’t using your overdraft at the moment, you may feel tempted not to switch bank accounts so you still have the overdraft there as a cushion. But DMPs are flexible – if you have a sudden financial problem, you can ask for your payment to be reduced or suspended for a few months.
The whole aim is not to run up new debts. And overdrafts are some of the hardest types of debt to pay off. And some of the most expensive! Getting a clean start from your debts is one of the main aims of a DMP, and that includes overdraft.
How bad will my credit score be?
This depends on a lot of factors, including how large your monthly payments are and how long your DMP goes on for. See How does a DMP affect your credit score for details.
But if you can’t make the normal monthly payments to your debts because they are too large, there is no alternative that will leave you with a good credit record. See Don’t let credit record worries stop you taking action on your debts for details.
You can make arrangements with your creditors yourself, but these have exactly the same effect on your credit score as a DMP through a firm.
Your partner’s credit rating is only affected if you have joint accounts with them – a joint bank account, joint loan or mortgage. With no joint accounts, they won’t be affected just because you live in the same house, even if you are married.
Can I get a mortgage afterwards?
Yes. You will need to repay the debts in the DMP, then the exact timing will depend on how long it takes to save a deposit and what your credit record looks like. See Can I get a mortgage after a DMP? for details.
This may sound like it will take a long while, but if you have unmanageable debt, there aren’t any quick routes to buying a house!
Is there a better option for you?
If you are having problems repaying your debts, you often don’t have any nice options. If debt management will take too long and you don’t expect your situation to improve in the next few years, you should look seriously at your other alternatives. You may find the following comparisons useful:
Then there are big lifestyle changes, if you think you can cut your expenses a long way or get a lodger or even sell the house.
One option which isn’t there is muddling through for another year or two and watching your debts carry on increasing… However worried you are about a DMP now, the problem will be worse when your debts are bigger, so putting off a decision is likely to be the worst thing you can do.
One big advantage of a debt management plan is its flexibility. If you aren’t sure, you can give it a try and see how well you can cope with that monthly payment.
If you haven’t yet talked to a debt advisor about debt management, give StepChange a ring. They run more DMPs than any other firm, and if a DMP isn’t right for you they can talk to you about your better alternatives.