Debt Management Plan – DMP Guide

If you find yourself struggling to make repayments on things such as personal loans, store cards or credit cards, a Debt Management Plan (DMP) could help people in debt manage their situation. It is just one of the choices available to UK debtors looking for a solution to their money troubles, with an informal and flexible approach to credit management.

What is a Debt Management Plan (DMP)?

A Debt Management Plan is an informal agreement made between a debtor and their creditors to make regular repayments towards an outstanding unsecured debt, normally in circumstances where they are struggling to meet the repayment amount that they originally agreed to.

It is usually set up by a third-party provider (for instance a charity or private debt management company) who will help you to create a financial plan that is affordable for you. This will typically include a budget for you to stick to, along with a plan for making regular payments towards your current debts that should suit your unique financial circumstances. With a plan in place, you should have enough money to cover the essentials such as food, accommodation, household bills and transport whilst putting any surplus towards paying your creditors.

One of the most obvious benefits is that a DMP will allow you to make reduced monthly payments to your creditors that are affordable for you in your current situation. Whilst this can help you cope with difficult financial circumstances, DMPs are not legally binding and your creditors can still contact you or initiate legal proceedings if the need arises.

Do debt management plans hurt your credit rating?

Despite not being a formal debt solution, it will often affect your credit score and ability to access further credit in the future. This is because your DMP is likely to involve agreeing to make payments towards debts that are less than the minimum repayment amount agreed at the time when you took out credit.

When creditors review your credit file, there are a few tell-tale signs on your credit history that indicate you are on a plan. These include your payment history, which could show part repayments towards outstanding debts, ‘markers’ on accounts where the creditor has agreed to accept payments, and details of any time where a creditor has defaulted your account.

Although these factors might influence the decisions of credit providers that you may approach in the future, they won’t be there forever and details of any court action missed payments or defaults will be removed from your credit file six years after they happen, whether you have fully repaid or not.

Will a DMP affect my home?

In the majority of cases, it should not affect your home as long as you continue to make repayments towards your rent or mortgage. These are priority debts and failing to pay them could result in severe consequences. When setting up repayment plan the costs of your rent or mortgage should be covered within your budget as an essential expenditure. Keep in mind, however, that it is not a formal insolvency solution and does not prevent your creditors from taking legal action against you – which could affect your home if it is part of secured debt.

Whilst your existing rent or mortgage should not be affected by a DMP, applying for a new mortgage or tenancy agreement may be a different story. For one thing, some agreements include restrictions on the amount of debt that you can take out without first seeking the agreement of your provider and, in any case, your existing creditors may not be willing to continue cooperating with your plan if you are actively seeking significant amounts of new credit. As being on a repayment plan may affect your credit score, you might find it more difficult to find a mortgage lender willing to make you an offer even if you do have the blessing of your provider.

Can I save money while on DMP?

Being unable to rely on the safety net of savings is one of the primary reasons people fall into debt issues in the first place. When you’re hit with an unexpected cost such as a vehicle repair or the need to replace essential white goods, having no savings might mean that your only option is to turn to further credit – which could make it more difficult to deal with your wider debt situation in the long run.

There are a number of ways that you can keep on saving money whilst on a DMP, not least by sticking to your budget and cutting back on non-essential spending.

Can you end a DMP early? 

DMPs are intended to be a flexible debt solution and so you may find that it is possible to end your DMP early by increasing the value of your monthly payments or by paying a lump sum.

Your regular payment is worked out by looking at your essential costs and how much you can realistically afford to repay after these have been dealt with. It is quite common for circumstances to change during the course of a DMP and you may find yourself with surplus funds that you could put towards paying off your debts within a shorter time.

What if you can’t afford your DMP?

If you find that you are unable to afford your DMP payments, acting quickly can help. Many debtors find that their first port of call is speaking to their provider and in some cases even seeking advice from a qualified financial advisor. It’s important to keep your creditors up-to-date with your circumstances and your DMP provider will help you to do this whilst looking at ways to make things more manageable.

DMP Failure – How can a DMP fail?

Despite DMPs being considered flexible debt solutions, some circumstances can cause them to fail. In many situations, letting your DMP provider know of any issues or changes to your circumstances can help to prevent failure.

Signs that your plan may not be working include that you’re struggling to make your DMP payments, failing to keep up with priority debts such as a mortgage, or going without essentials such as food or sanitary products to make your DMP payment.

DMP failure can happen for lots of reasons, but often it can come down to setting a budget that simply doesn’t work for you or missing payments and letting the debt get on top of you.

Is a debt management plan a good idea?

Whether it is a good idea for you will depend on your own circumstances. All major financial decisions, especially those concerning debt, should be taken from a fully informed position after receiving qualified advice and choosing to enter a DMP is no different.

How long do debt management plans last?

There is no set period of time for which a debt management plan lasts, and as a flexible debt solution, the length of a plan will vary dependent on your circumstances. How long your plan will run for will be calculated based on the amount you owe and how much you can afford to regularly repay, but it could last for as long as 10 to 15 years.

Frequently Asked Questions

Do I have to include all my debts? 

It is possible to include most of your unsecured debt, such as credit card debts, payday loans, catalogue debts, personal loans and overdrafts. These types of debts are considered non priority debts, as opposed to priority debts such as utility bills and council tax arrears, which are not commonly included.

There are some organisations which allow priority debts to be included, however, these will be paid first. Once the priority debts are paid, the amount paid towards non priority debts is increased.

Is a DMP better than an IVA? 

A DMP could be the better option for some people while an Individual Voluntary arrangement could be better for others. The main difference between the two is that IVAs are legally binding agreements while debt repayment plans are informal solutions. 

Why does my DMP payment need to be reviewed each year?

All DMP providers which are authorised and regulated by The Financial Conduct Authority (FCA) are required to review your plan at least once a year. This will ensure that your plan is the right option for you and accurately reflects the amount you can realistically afford to repay each month.

By using a debt management company which is authorised and regulated by the FCA, you will benefit from transparency about any fees and the risks associated with any service they provide.

I’m struggling with my debts and I need advice

If you’re struggling to cope with your financial situation, help is on hand. The organisations listed below can provide free and impartial debt advice that could help you to make sense of your situation:

• Money Advice Service
• Step Change
• National Debtline