A debt management plan may be an effective way to manage your debts
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What is a DMP?
Think of a DMP as a agreement between you and your creditor which acts as confirmation that you will pay off all of your debts. A DMP could help you manage your debts by reducing the monthly repayment and offering a clear line of sight to becoming debt free. If you’re struggling to keep up with payments on credit cards, loans or store cards, a DMP might be right for you.
Do I qualify for a DMP?
You do not need to have a minimum level of debt in order to qualify for a DMP. There are just three questions to ask yourself when considering your eligibility:
- Are you struggling to make repayments for your existing unsecured debts?
- Would you be able to afford lower monthly repayments?
- Can you afford to pay your debts in full within a reasonable amount of time?
If you can answer ‘yes’ to all three, there is a very good chance you will be able to implement a DMP.
- Your monthly debt repayments will be reduced (sometimes significantly)
- You will no longer have to deal directly with creditors, leaving that task instead to your DMP provider
- Some creditors may freeze interest payments when you enter a DMP
- If you have any County Court Judgments (CCJs) or similar actions against you, a DMP may suspend them.
- DMPs are informal agreements (sometimes a disadvantage – see below) which avoid formal insolvency procedures such as bankruptcy.
- If your debts are extensive, you could end up in debt for a very long time or, at worst, without a chance of ever becoming debt-free
- Your credit rating may still be negatively affected
- Because DMPs are informal, your creditors are allowed to change their minds at any time without recourse
- Not all creditors will freeze interest under DMPs – particularly if when you possess debts on arrears residing at higher interest rates than the original loan rate
- The reduction of your monthly repayment means it’ll take you longer to repay your debts.
The DMP process
DMPs consolidate all of your existing debts into one, single monthly payment. That payment is then divided amongst your creditors. While not every DMP process is the same, you can expect something along the following lines:
- A DMP provider will typically start by asking for a budget which will list income, debts and expenditure, and provide an indication of funds available once all priority debts are paid for.
- DMP providers will deal directly with creditors on your behalf in order to negotiate lower repayments, saving you the task.
- You will agree a new, fixed monthly payment and repayment term with the DMP provider and sign a contract to confirm your acceptance.
- On commencement of the plan, a new Direct Debit instruction will be issued for the single monthly payment.
- DMPs are not legally binding, therefore you shouldn’t have a minimum contract to which you are obliged to adhere, enabling you to cancel the plan at any time.
Is a DMP right for me?
A DMP could be the perfect strategy for you, if the following apply:
- You are struggling to keep track of creditors
- You are unable to respond to creditors in a timely fashion
- You are struggling to keep up with you loan or credit card debts, but can afford priority debts such as your council tax and mortgage
- A single, set monthly payment will help you budget
DMPs can be a lifeline for those saddled with several streams of debt via multiple creditors. If you are confident you can afford the debt and are able to pay it back within an acceptable timeframe, a debt management plan could be the answer. DMPs are one solution to personal debt problems and it is always advisable to consider every option before making a decision. Ideally, take advice from specialist advisers.
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