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.
I am assuming here you are using a DMP firm – it doesn’t make any difference if you go to a free DMP firm or a fee charger, they all work in exactly the same way.
Will I get lots of phone calls from creditors?
You need to stop making your usual payments to your creditors as your DMP payments will be coming from your DMP firm. This sounds scary – aren’t you going to get a lot of phone calls?
You will get some calls in the first month or two. You may be phoned or written to asking why you haven’t paid them last month and would you like to pay right now? And the creditor may say they can’t see a record of your DMP. Just tell them you can’t afford the payments, your DMP firm will be writing to them and they will be making all payments from here on. Don’t make a payment yourself!
The phone calls really do stop! There are hundreds of thousands of people happily in DMPs – and they wouldn’t be happy if creditors kept ringing.
Will my DMP be accepted so interest is frozen?
A DMP can’t be vetoed by one or two creditors, there isn’t a formal vote on it. It’s up to each creditor to decide whether to accept the offered monthly payment and freeze interest.
Most creditors when shown an Income and Expenditure statement do agree to freeze interest and not add default 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 – annoying, but it will soon be sorted.
Sometimes a creditor will say they can’t do this until you haven’t made the normal monthly payments for a few months – annoying, but it will soon be sorted.
If a creditor is still adding interest after a while, you can write to them and complain to the Financial Ombudsman if they don’t – there are template letters here.
Will my debt be sold to a debt collector?
Possibly – the longer your DMP goes on, the more likely this is. But it isn’t usually a problem – 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. This isn’t something to worry about at all.
Will I get CCJs?
A creditor can get a CCJ even if you keep paying the monthly DMP payment. But this isn’t common because 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. It is most likely if your DMP goes on for a long while and you have a lot of equity. It’s very unusual at the start for consumer (credit cards, catalogues, loans) debts. The people that taken to court 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.
If you are worried about charging orders, they are VERY rare, see Is my house safe? for statistics.
I won’t be able to get a new bank account
This used to be a problem but now it isn’t. In January 2016 the major banks all started offering good basic bank accounts to people with poor credit records.
How bad will the effect on my credit rating 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. You can make arrangements with your creditors yourself, but these have exactly the same effect 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. If you don’t, they won’t be affected just because you live in the same house, even if you are married. See How will a DMP affect my partner? for more details about this.
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!
I’m not sure I can afford that DMP payment
It’s a big change to switch from having lots of debts to pay but also credit cards and an overdraft to use, to living on your income each month and making a single debt management payment. Some people find it restrictive but many people in practice don’t – you may find What’s it like to live in a DMP? interesting reading because that has the results of a large-scale survey of Payplan clients.
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.
If you are self-employed with a fluctuating income, talk to Business Debtline about your situation.
What alternative do you have?
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.
Give it a go?
One big advantage of DMPs is their flexibility. You can start one then if you get a better job, you can go back to normal debt repayments. If after a 6 months you are confident you can live with that monthly repayment, that may give you the confidence to go for the formal legal agreement of an IVA. Or you may decide bankruptcy is going to work better for you family. Or you may feel that a DMP is indeed the right solution for you.
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.