- 1 Who is eligible for a DMP?
- 2 Do I have to include all debts in a debt management plan?
- 3 How is a debt management plan calculated?
- 4 What happens if I receive an unexpected windfall?
- 5 I am self-employed, can I enter into a DMP?
- 6 What happens if I miss a payment?
- 7 If I have a DMP arrangement could a creditor still make me bankrupt?
- 8 Will a debt management plan impact my credit rating?
- 9 Who will know about my DMP?
- 10 Can I cancel my debt management plan?
- 11 How long can a debt management plan last?
- 12 Why does my DMP payment need to be reviewed each year?
If you are considering arranging a debt management plan (DMP), it is likely that you will have a variety of questions. To help you understand exactly how a DMP works, we have compiled this list of key facts.
Who is eligible for a DMP?
To be eligible for a DMP you will need to have a disposable income, which can be used to make monthly payments. The payments should be large enough to be able to repay your debts in a reasonable amount of time.
Do I have to include all debts in a debt management plan?
It is possible to include most of your unsecured debt in a debt management plan, such as credit cards, 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.
A debt management plan is an informal agreement and your creditors will not be legally required to agree to the terms proposed in the DMP, which may mean that not all your debts can be included. However, in practice many are willing to accept a payment arrangement, as they may feel with an agreement in place, they will be more likely to receive payment for the debt.
How is a debt management plan calculated?
A DMP provider will consider a variety of factors when they calculate how much you can afford to pay on a monthly basis. You will need to provide your budget, including your priority household bills and important living expenses. Typically, seasonal expenses such as birthdays and Christmas will also be included within your budget under the heading ‘sundries and emergencies’. Depending on the provider, you may also need to pay a fee for their service each month.
The amount which is left after paying these each month will be the figure you can pay towards your plan. The aim of calculating your payment is to leave enough to cover your expenses, so you retain a reasonable quality of life while repaying your debts. A DMP could be arranged for a low amount, however, if you have significant debts you could be repaying this amount for a long period of time to clear your outstanding debts.
What happens if I receive an unexpected windfall?
It is not uncommon for those on a to receive a sum of money which is more than their average income, such as compensation, inheritance or a lottery win. As a DMP is an informal agreement, you will not be legally obligated to use the windfall to repay creditors. However, you could use the funds to settle outstanding debts, with some creditors potentially accepting a reduced payment amount to settle the debt.
I am self-employed, can I enter into a DMP?
Yes, you can arrange a DMP to help you repay your debts while continuing to run your business. However, there are more factors to consider when arranging a plan, compared to those who are employed. You will be required to calculate your personal income, based on the average revenue and costs of your business. It is possible to include some debts of the business in your debt management plan, such as personal credit cards and overdrafts which have also been used to cover business expenses. However, any personal tax arrears and outstanding VAT payments cannot be included.
What happens if I miss a payment?
If an unexpected financial emergency arises forcing you to miss a payment, your provider may want to review your budget to see if the repayments need adjusting. By missing a payment there will be implications to the term of your DMP, as it is likely to be lengthened to recoup the missed payment. However, it is worth noting that if you frequently miss payments, the DMP could fail or be cancelled, as you will not be sticking to the conditions laid out in your agreement.
If I have a DMP arrangement could a creditor still make me bankrupt?
In England, Wales and Northern Ireland a creditor is only legally able to make you bankrupt if your debt to them is more than £5000, or £3000 in Scotland. However, it is very rare for creditors to do this, as there are expensive fees and they have no guarantee of receiving the money owed. If a creditor does make a formal demand and begins bankruptcy proceedings, your DMP provider will be able to offer advice on what to do next.
The creditors will be asked to stop interest and charges on the debt while the debt management plan is in place, however, this is not a guarantee and you may still be charged for these. Once a DMP is arranged your creditors should not contact, however, if they wish they can still contact you and take further proceedings to recover the debt.
Will a debt management plan impact my credit rating?
For each debt which is included in the plan, the creditor can add a note to your credit file that you have a payment arrangement in place. In some cases, this is referred to as a DMP flag, although there is no specific area of your credit report which contains this information. As you will usually be repaying less than the original amount laid out in the original credit agreement, there will be an impact on your credit rating. However, not all creditors will update the credit reference agencies with details of the reduced payments being made during the agreed plan.
However, having the debt management plan recorded on your credit file will also mean that when the plan ends it will be marked as complete. This will show that you have made efforts to repay your debt and are able to effectively manage your finances.
Who will know about my DMP?
There is no public register with names of those who are on a DMP, as they are a private arrangement. The only time a person will be made aware of a plan is if a credit check against you is carried out and the companies involved have recorded it on your file If the plan is not listed within your credit report, the information may show that reduced payments are being made instead.
Can I cancel my debt management plan?
You will not be legally required to commit to any agreements made by the DMP provider, as the arrangements are not legally binding. If you decide to cancel, you will need to contact your provider who will inform your creditors that the agreement has been cancelled.
It is important to remember that by cancelling your DMP, you will take back responsibility for liaising with creditors again. You may find that creditors are less willing to agree to future repayment arrangements you propose, if you have cancelled a prior agreement.
How long can a debt management plan last?
The exact length of your DMP will depend on the amount you owe and how much you can afford to repay each month. In general, those with a large amount of debt who can only afford to pay a small amount each month will have a longer term than those making large repayments towards a small debt.
Although, it is possible to reduce the length of your plan if your circumstances change. If your income increases or your outgoings reduce each month, it might be possible to increase the number of your monthly payments to reduce the overall length.
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 DMP 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.
If you would like free and impartial advice about managing your debt, organisations such as The Money Advice Service, StepChange and National Debt Line can discuss various aspects of financial management.