The Debt Management Plan Process
What is a DMP?
It’s an informal agreement between your creditors and a third-party company on your behalf, to help you pay off multiple debts. You transfer an agreed amount to the debt management company, usually once per month, and your DMP company splits it between all of your creditors, so you only have one agreement to worry about.
DMP stands for Debt Management Plan — helping you to resolve debts to multiple creditors – and it’s not as scary as it sounds!
Who offers them?
There are a lot of debt management companies around, but one key difference between them is the cost. Some debt management companies work as charities, so they won’t charge you anything for helping you with your debt; however, you have to pay some companies a monthly fee for the administration of your debt management plan:
if you choose a commercial DMP provider that charges, it can take you a lot longer to pay off your debt, as you will have an additional cost to cover on top of your original debts.
How do they work?
We’ve compiled a step-by-step guide to the DMP process to show you it isn’t so intimidating, and that debt management companies can really help you out if you are struggling to repay your debts.
Step 1: Is a DMP right for you?
If your circumstances change during your loan term, your creditor will understand this, so the first thing to do is get in touch with your creditor and ask for a more affordable repayment plan and see if they will freeze your balance so additional interest doesn’t continue to accrue whilst you’re repaying the debt. Remember, creditors want to help you to repay your loan without it putting you into major difficulties with your priority bills and essential living costs.
However, if you’re still thinking about entering a DMP because you have multiple loans that you need arrange to repay, but you’ve got a relatively good handle on your finances, then you might just need some debt advice.
Debt charities like StepChange and National Debt Line can offer free advice to help you get your finances in order, so you can take control and tackle your debts yourself. They will give you the necessary tips and guidance, so you can set up repayment plans with your creditors without the need for third party involvement.
However, if you are feeling bogged down and stuck and you’re struggling to organise your finances yourself, a DMP can be a great help to get your finances on the right track.
Step 2: Choosing your Debt Management Company
The main thing to remember here is what works the best for what you can afford. If you choose a debt management company that charges a fee for helping you manage your debts, it will take longer to pay your debt off and you will end up paying more in the long run, whereas free companies and charities give advice and help to you free of charge.
So if your financial situation changes, and you find yourself worried or struggling to keep on top of your commitments, you can speak to impartial and independent debt advisors, such as StepChange (www.stepchange.org), the National Debt Line (www.nationaldebtline.co.uk) or Consumer Credit Counselling (www.cccs.co.uk). Arranging debt management plans with a free service means you can avoid paying fees to commercial advisors, and you will be totally in control of your finances. Your debt lifetime will be much shorter and you will only repay the debt you are currently in.
Step 3: Let creditors know you are entering a DMP
Once you’ve decided that you are going to set up a debt management plan and you’ve engaged with your chosen debt management company to start the process, you should also get in touch with all your creditors and update them on your situation.
Either call or send a quick email identifying yourself and the debt management company you have chosen to work with, and including your reference number for the creditor and your reference number for your debt management company. This way the creditor will hopefully be willing to agree to freeze your account and they know who to contact if they have further question regarding your debt management plan.
This process can be done together with informing your DMP company who all of your creditors are and how much you owe to each one, as the basis to start setting up your plan.
Step 4: Create a budget sheet
Your debt management company will walk you through this as each provider will have its own individual approach, but essentially you will draw up a list of all your income and expenditure on a monthly basis. Once you have a good picture of how money you have coming in and going out per month, you can see much disposable income you have (income left over after tax and priority bills e.g. rent, council tax, utilities) which will help you decide how much you can afford to repay your creditors.
Unfortunately, tackling debt isn’t an easy exercise, which is why getting support from advisors, friends and family is crucial. At this stage, it is important to remember what items are essential and where in your expenditure you can cut down: life’s little luxuries will have to go on hold for a while as getting out of debt should be your main priority.
For tips on how to cut down your spending and save a little each month, check out our blog here.
Step 5: Entering your DMP
In most cases, this is a quick and easy step. You set up your payments to your debt management company each month based on what you can afford from your budget sheet, and that’s all you have to do. Your DMP provider will split your full payment between your creditors, so each creditor gets a pro-rata, i.e. proportionate amount of your discretionary income that you can afford to contribute.
For example, if you have total debts of £500, but you can only afford to pay £80 per month towards clearing everything, over a total of four different creditors, this is how your one monthly payment would be broken down and paid to each of your creditors.
Total debt = £500
Creditor 1: £188
Creditor 2: £162
Creditor 3: £110
Creditor 4: £40
Total monthly payment = £80
Payment to creditor 1: £30.08
Payment to creditor 2: £25.92
Payment to creditor 3: £17.60
Payment to creditor 4: £6.40
However, unfortunately, as a DMP is not legally binding, certain creditors may not agree to stop all interest and charges being added to your account, and they may continue to contact you, although if they do, they should really have a good reason for doing so.
Step 6: Keep up with your payments.
It is important that once your DMP is set up, you maintain your monthly payments and budget accordingly. Most creditors will comply with your DMP but if you miss your payments they may start chasing you for payment directly again and proceed with further action against you such as placing a Default on your credit file or transferring your account over to a debt collector.
You can search these terms in our Clear and Fair loan glossary if anything is unclear.
If you do have a change in circumstances and can no longer afford your agreed monthly payment, you must let your debt management company know as soon as possible as they may be able to agree a token payment to creditors or a hold on your account for a short time. Similarly, if you can afford to increase what you pay each month to help settle your debts more quickly, let your DMP company know.
REMEMBER: DMP companies may cancel your DMP if you regularly miss your repayments and fail to show your commitment to repaying your debts.
Maintain contact with both your debt management company and your creditor, as that way they will be much more inclined to offer you help and support.
Can I leave my DMP?
Because a DMP is an informal agreement you are not legally bound to it. This means you can stop your debt management plan at any point and take it into your own hands if it just isn’t working for you. Some companies offer advice as well as DMPs, so even if you want to leave your debt management plan, you can still get advice regarding your debt and how to deal with it.
Life after your DMP
Creditors can place a DMP handle against the record of your account with them on your credit file until you have settled that debt. There is no DMP marker attached individually to you — only to accounts that are currently in a DMP. So once your DMP is completed and all your debts are paid, you can start to rebuild your credit rating again and improve your financial situation….
At Clear and Fair, we compare direct lenders for payday loans which can help you bridge a gap between paydays when you have a short-term cash flow problem.
REMEMBER: if you know you are struggling to meet your current outgoings including existing credit commitments, avoid taking out further credit that you know you cannot afford to repay on time, since this will only worsen your financial situation as well as your credit rating. Only compare lenders if you know you have a good handle on your finances and will be able to repay your loan on time, which can then in turn improve your credit rating for the future.