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. Another reader has asked if he can get a new mortgage fix if he is in a DMP
I thought it would be useful to look at the most common concerns people have about DMPs.
Setting up a DMP
Will I get lots of phone calls from creditors?
You should stop making your usual payments to your creditors while a DMP is being set up.
This sounds scary – aren’t you going to get a lot of phone calls?
You will get some calls, texts or emails in the first month or two. They may be asking why you haven’t paid them last month and would you like to pay right now?
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 creditor may say they can’t see a record of your DMP. That doesn’t mean anything is going wrong or the creditor won’t accept your DMP. It’s just that the DMP hasn’t yet been recorded on all the creditor’s systems yet.
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.
My DMP payments is low – will it 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. They normally do! 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 usually gets sorted pretty quickly in the first 2 months. leave a comment below this article if you have a problem.
Will interest be frozen on all my debts?
Your DMP firm will send your creditors an Income and Expenditure statement which shows you can’t afford to pay more money than is being offered. S0 most creditors do agree to not add more interest and charges.
The proof of this is the very large number of DMPs that are running. People wouldn’t bother if their debts kept going up!
If unusually 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.
I would like to keep my overdraft outside my DMP
This isn’t a good idea at all. Including your overdraft in your debt management plan means that the charges will stop.
You need to switch to a new bank account. All 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.
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 getting rid of your overdraft.
And if you have been using your overdraft for most or all day a month for a long while, look at making an affordability complaint winning that will speed up your DMP a lot
During a DMP
What is it like living in a DMP?
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.
A few people find a DMP very restrictive but many people in practice don’t. Some people find they actually have more money to spend on everyday things without all the debts being paid first.
And if you have been juggling debt repayments for a long while it will be a huge relief to stop. Gradually the anxiety about money and letters from debt collectors fades.
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 DMP firm about these.
Self-employment with a fluctuating income can be difficult. Talk to Business Debtline about this situation.
Will my debt be sold to a debt collector?
Possibly after a while. The longer your DMP goes on, the more likely this is.
But this doesn’t matter and you don’t have to do anything:
- your DMP firm starts paying the debt collector the same amount 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?
Legally 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 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 court often sets your CCJ payment at the same level that your DMP payments is … and creditors know this.
The only common exception here is guarantor loans, where the lenders often seem to go to court.
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 extremely rare, see Is my house safe? for statistics.
What if I can’t afford that DMP payment
DMPs are flexible, so your payment can be changed. You don’t want to do this every month – one of the main advantages of a DMP is that it is stress free and doesn’t need changing often.
So don’t be too optimistic about what you can pay. And say Yes to saving a small amount.
If you have a temporary problem such as a bigger than expected car service bill, you can ask for your monthly payments to be suspended or reduced.
Credit scores and mortgages
How will it affect my credit score?
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.
What about my partner’s credit score?
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.
Can I get a new mortgage fix when I am in a DMP?
You may well be able to get a new fix from your current mortgage lender unless you are in arrears. See Mortgage lenders’ commitments to borrowers which says:
At the meeting [with the Treasury], lenders committed to help all their customers by: enabling customers who are up to date with payments to switch to a new competitive, mortgage deal without another affordability test.
But if you want more than just a new fix from your current lender – from a new lender, or if you want to borrow more money from your current lender – you probably can’t.
With a lot of unsecured debt you are likely to fail any affordability test from a new mortgage lender. But here it is the debt that is the real problem not the DMP. If you don’t start a DMP you probably still won’t be able to remortgage elsewhere.
There isn’t a way around this problem. If you can’t afford the normal debt repayments then you need some form of debt solution. Borrowing more only postpones the problem and makes it worse. And an IVA is a form of insolvency that will make it even harder to get a new mortgage fix than a DMP does.
Is there a better option for you?
If you are having problems repaying your debts, you often don’t have any nice options. If a DMP looks like it will take too long, look at the various ways that it can be speeded up.
But if 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:
One option which isn’t better 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 harder when your debts are bigger. Putting off a decision now 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 a DMP 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.