Debt Management Plan (DMP) Pros And Cons

A debt management plan (DMP) gives you the opportunity to repay your outstanding debts at a lower rate agreed to by your creditors. This is facilitated by a credit counselling agency who will carry out negotiations on your behalf to reach an agreement that suits both parties. A debt management plan does have pros and cons, both of which we explain in more detail below.

What are the pros of a Debt Management Plan?

Debt management plan pros and cons

Long-term improvement for credit score

Unfortunately, it’s difficult to avoid the fact that debt is likely to have a negative impact on your credit score. A Debt management plan will allow you to start paying back some of that debt, although the amounts will be lower than originally agreed with the lender, which will be noted on your credit file. However, the positive is that you are making a commitment to repaying your debts in full, which will be noted on your credit file once your DMP is complete. This also means you are avoiding insolvency, which can have a far worse effect on your credit score.

Less need to apply for insolvency

Applying for insolvency could create issues with work and further credit options, while bankruptcy may require you to sell valuable assets such as your home or car. A DMP is not a legally binding option, which means you will not be recorded on a public insolvency register. This keeps your financial affairs private and more in control of how you pay off your existing debts, without dealing with the same restrictions that come with insolvency or bankruptcy.

More manageable debt repayments

The idea behind a DMP is to find an acceptable repayment schedule that creditors are willing to accept. While it will take them longer to receive all of their money back with a debt management plan, they may be more willing to accept your offer as it offers a guarantee of repayment. The short-term benefit is you may not have to repay the same amount originally agreed on a monthly basis. And in the long term, this allows you to balance your essential bill payments with your existing debts while avoiding falling further into debt.

All of your debts are consolidated in a debt management plan

A DMP consolidates all your outstanding debts into one monthly instalment, so you do not have to worry about making a number of payments to different creditors each month. The payment is made to the credit counselling agency who will then distribute the money to the individual lenders as per the agreement. This removes the need for you to meet multiple payment deadlines every month while also avoiding potential late payment fees. Even though your creditors are not legally obliged to agree to your proposal, in most cases, they are more likely to agree to a debt management plan than not.  

Reduced contact with creditors

Once the debt management plan has been put together and submitted to your creditors, they will then decide if they wish to accept the proposal. If so, as long as the repayment plan is followed each month, you may experience less contact from them. If this is the case, it could mean no more letters and phone calls chasing you for outstanding debts, as you will be repaying at a rate agreed to by the lender.

You could stop further interest and charges

High interest rates on things such as credit cards and unsecured loans can significantly increase the size of the debt, adding to the expense and time it takes to settle the full amount. As part of the negotiation process carried out on your behalf by the credit counselling agency, they may be able to negotiate with the creditors to freeze or stop further interest and charges on your debts. If the agency can negotiate this it could also reduce the time it takes to complete your DMP.

The chance of a new start

Any debt you accrue will remain on your credit file for 6 years from the date they defaulted or were paid off. While a DMP allows you to pay back your debts in full, the lowered repayments will mean it takes a longer period of time, also affecting your credit score for a longer period. However, as long as creditors add a DMP ‘flag’ to your file, anyone else looking at it will see you are committed to repaying in full. Once the agreement is completed, and your debts repaid, you then have a chance to rebuild your credit score and restart again.

What are the cons of a DMP?

Cons and disadvantages of debt management plans

Completion time is longer than alternatives

There is no fixed timeline for a debt management plan to be completed, as the end date depends on the amount of money that needs to be repaid in the DMP. Only once all outstanding funds have been settled and lenders repaid can the agreement be ended. Depending on the agreed repayment amounts this can sometimes take a number of years to complete. Compared to other legally binding methods, like an IVA, used to write off debts a DMP could last longer – although there a number of pros and cons that come with taking alternative options.

Credit card accounts will have to be closed

If you have any credit cards included in your DMP these will have to be closed as part of the agreement. This is to ensure no more debt can be accrued while you are in the process of repaying the debt. You may also be advised to avoid using any other credit cards you own, regardless of whether or not it features in your debt management plan, so you can minimise the risk of creating new debt elsewhere. If you do create more debt and this is repaid in full outside of your plan, other creditors are likely to see this as preferential treatment ahead of the money owed to them.

You will be advised not to take out extra credit

While a debt management plan is not a legally binding agreement, the credit counselling agency is likely to advise you not to take out any further credit while paying back your debts. This is partly because taking out any further credit could make it more difficult to maintain your plan payments. Also, if your existing creditors become aware of the new line of credit, they could renege on the agreement as any debts paid back in full outside of the DMP could be seen as preferential treatment over the money you owe to them.

Your proposal could be rejected

While the credit counselling agency you are working with will try their best to agree to terms with your creditors, there is no guarantee they will accept the terms of your proposal. A DMP is not a legally binding agreement, which means creditors are not obliged to agree to the terms. This differs from IVA which only requires a certain portion of creditors to accept the proposed plan in order for it to be greenlit. 

It may prove to be a more expensive option

Providing your proposal is accepted, a DMP will lower your monthly payments to creditors. It also means that your debts will have to be paid in full over the period of the time agreed to in the plan. There is also no guarantee that creditors will agree to freeze or lower interest attached to your debts, which could add more to the existing amount. Some DMPs provided through private companies may also charge administrative fees in addition to the money being paid to creditors.

The agreement is not legally binding

DMPs are agreed to in principle by creditors but they are not legally binding. If they agree to your proposal you may not hear from them as frequently as before. However, this does not mean they are not allowed to contact you if they wish to do so. There is also the chance they could decide to stop the DMP at their discretion, however, if you have stuck to the agreed payment schedule there is less reason for them to do so.

Last Updated on December 15, 2020

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