Debt Management Plan

What is a Debt Management Plan?

If you’re over-indebted, it’s time to get some debt management advice. Credit cards and personal loans are great in moderation – they enable a sense of financial security and make it possible to make important large purchases. However, if left unchecked, these types of unsecured loans can quickly spiral out of control, and there is not much worse than the feeling of being in deep financial trouble. Enter the debt management plan (DMP)

Debt in the UK is a considerable concern. Statistics show us that the average Brit paid around £865 in interest 2020 alone.  One thing that can make these types of debt hard to get out of is the payments are often confusing, and the interest rates are so high that half the time, you are just paying off the interest and not actually reducing the principal debt.

Debt can have a long-term effect on families, both from the financial and mental toll it takes. Luckily, you can take action if you are finding yourself drowning in debt and feeling like there is no way out. One such action is to take up something called a debt management plan (DMP). If you’re not familiar with a DMP, don’t worry. We’ve pieced this guide together to tell you everything you need to know about the best debt management plans.

If taking control of your debt is something that appeals to you, no matter how much debt you may have, then read on. We will discuss the eligibility process, how DMP plans work in detail, and discuss the pros and cons of having one. Debt management plans will not be for everyone, but they are certainly one effective way of managing and controlling unsecured debt, such as Debt Relief Orders and Individual Voluntary Arrangements (IVA).

Debt in the UK is a considerable concern. Statistics show us that the average Brit paid around £865 in interest 2020 alone.  One thing that can make these types of debt hard to get out of is the payments are often confusing, and the interest rates are so high that half the time, you are just paying off the interest and not actually reducing the principal debt.

Debt can have a long-term effect on families, both from the financial and mental toll it takes. Luckily, you can take action if you are finding yourself drowning in debt and feeling like there is no way out. One such action is to take up something called a debt management plan (DMP). If you’re not familiar with a DMP, don’t worry. We’ve pieced this guide together to tell you everything you need to know about debt management plans.

If taking control of your debt is something that appeals to you, no matter how much debt you may have, then read on. We will discuss the eligibility process, how DMP plans work in detail, and discuss the pros and cons of having one. Debt management plans will not be for everyone, but they are certainly one effective way of managing and controlling unsecured debt.

Best Debt Management Plan

debt management plan (DMP) is a simple yet effective way to manage your debts by consolidating them all into one easy payment. It works for different types of debt, including loans and credit card debt; however, not all debts will be eligible.

Reform Debt Solutions will connect you with the correct insolvency practitioner to look at your debts and work out which ones can be covered under a debt management plan. These professionals in the know will also come up with a payment plan that will work with your financial situation and result in all the debt being paid off completely.

When you have a debt management plan, you will still be paying off what is owed by consolidating it. The payments will be simplified, more transparent, and easier to manage.  The main benefit of a debt management plan is that because it is a single payment, it becomes easier to manage and less overwhelming than having many smaller debts. This consolidation is part of what makes a debt management plan so effective and makes the likelihood of successfully paying off the debts so much higher.

Some people think that a debt management plan is similar to a traditional loan, but it is completely different. This distinction is important because we don’t want you entering into a debt management plan thinking that you no longer owe your creditors money. Taking out a large loan to pay off smaller loans is never going to be a good idea. With a debt management plan, your debts are not paid off by a third party – they still very much exist. Think of it more as debt management help – your existing debts are simply bundled into one single debt that is paid off by a single repayment rather than many small repayments.

One question that many people have about debt management plans is how long they take to pay off. This will depend on several factors, including the amount of debt and how much you can pay off each month. The idea of a debt management plan is for the repayments to be comfortable. To ensure comfortable repayment, the debts are consolidated and paid off over 3-5 years. This is a comfortable window and realistic for most people, as it is manageable. With a DMP, there is a light at the end of the proverbial tunnel.

Debt Management Plan – How Does it Work?

debt management plan works by taking all of the debts that you owe from varying lenders and consolidating them into one easy and predictable payment. When you decide to seek assistance from a debt management plan consultant, there are several steps that you will need to take.

The first step is recognising the need for debt consolidation. The main sign will be if you find yourself with too many lenders requesting payments all at one time. You will then contact a debt management plan agency or brokerage (that’s us, by the way) to ask you some key qualifying questions to determine your eligibility. They will look at the different debts you have in your name and various other factors, including your assets and income. Once you are deemed eligible, the debt management plan agency will draw up the plan and arrange one easy monthly payment. The payment amount will depend on the amount of debt owed, and how quickly you want the debt paid off (often between 3 – 5 years).

The most important thing to realise is that while your debt is being looked after and is in the process of being controlled, you are still in debt. Your debt is not wiped off until you make the final payment. This means that it is imperative that you do not continue to grow your debt while you are paying it off – so no more credit cards and no more unsecured loans. You need to be able to afford the monthly repayments of the plan live without new lines of credit. Managing your expectations while on a debt management plan is important to its success.

Because you will need to start managing your finances better while under a debt management plan, budgeting is so important.

Debt Management Plan UK – Is A Debt Management Plan for You?

If you find yourself overwhelmed with the number of repayments you need to make for your various debts, then a debt management plan could be what you need.

If you only pay the expected minimum on your debt accounts, you’re not going to get out of debt for many, many years. Gathering some advice on debt management and paying your debts down as quickly as possible takes determination, strategy, and professional debt management advice. At Reform Debt Solutions, we can put you in touch with advisors who can handle your entire DMP set up and ensure that you can get on top of your finances once more.

One reason that people are attracted to debt management plans is that they have a clear window in which their unsecured debts will be paid off in their entirety. Also, knowing what they have to pay off each month provides structure and takes stressful guesswork out of the process. There are no nasty surprises, or large interest rate jumps for over-indebted borrowers, and they also know that the debt will not grow (which tends to happen when unsecured debts are left untouched or not paid off quickly enough).

Of course, like everything, a debt management plan is not going to be for everyone. Firstly, you need to realise that there are fees and extra costs associated that you will need to account for. These fees are included in the final monthly fee paid.

You need to be comfortable with the minimum monthly payment every month, so you will want to ensure that your long-term income will be sufficient and consistent. The length of time it takes to pay off your loans will be several years, so you really need to consider the long-term costs. It’s not something that you can easily change your mind about after a year or two. Once you’re in, you’re in for the long haul (or until your debts are paid in full).

Discover the pros and cons in more detail below. It is essential to understand that not all debts are covered by the plan (namely secured debts which can be very large). So if you are struggling to meet the repayments for debts that are not included in the plan, then it is unlikely that a debt management plan will work for you in the long run.

However, there is no doubt that if you are found to be eligible and willing to make the small sacrifices required for the plan to work, then a debt management plan is a much better long-term financial goal than other options. It is a far better alternative to debt settlement or filing for bankruptcy, especially for your credit score. This is because DMP is an informal solution, which means that it isn’t recorded on the public insolvency register.

Debt Management Advice – Debt Management Plan Example

Let’s consider a case study. Gina, from Surrey, earns £19,000 a year but has managed to run up £31,000 in debt through credit card, overdrafts, store account, and small loans debt. As finances got tighter and bills kept coming, Gina, found herself falling behind in payments and suddenly in arrears. Her new expected installments to cover the lack of payments suddenly jumped to £853 per month, which just wasn’t affordable.

With debt and interest rising, Gina finally acquired the advice of a professional debt advisor via ReformDebtSolutions.co.uk, who told her that a debt management plan could be used to help her gain control over her debts. After scrutinizing her finances and earnings, it was agreed that she could afford £450 each month.

The professional debt advisor processed to contact the creditors on Gina’s list to negotiate the terms of a DMP with them. Most of the companies came to the party and froze the interest charged so that Gina can focus on slowly paying off what she owes. Gina pays £450 each month to her debt advisor, who supervisors the account and makes sure all debts are paid on time each month. Gina has the chance of becoming entirely debt-free in just six years.

Income Total Debt Cash After Living New DMP Installment
£19,000 a year £31,000 £450 £450 each month/6 years

What Is It Covered with a Debt Management Plan?

While it would be great for a debt management plan to eliminate every single dollar that you owe, this is not the case. Therefore, understanding what is and is not covered in a debt management plan is important. While these plans are great for managing credit card and personal loan debts, there are still quite a few debts that are not covered. These overflow debts need to be considered and managed independently while you are paying off the debts under the debt management plan.

Covered by DMP Not Covered by DMP
Unsecured loans (personal and payday) Bills (telecom and utility)
Overdrafts Child support and alimony
Money owed to family and friends Court costs and fines
Credit card and store card debt Taxes and government costs
Home credit and store card debt Student loans
Vehicle loans
Secured loan

The main thing to remember is that debt management plans will only cover unsecured debts (and even then, not all of them). Any secured debt (debt that has collateral against it) will never be covered, and these costs will need to be paid off separately on your own. Examples of secured debts that the plan will not cover are vehicle and home loans. The only exception to this rule is that debt management plans are not suitable for student loans – they are the only main unsecured loan that is not covered.

Costs of a Debt Management Plan

There will be some costs associated with a debt management plan. The main costs will be from setup fees and management fees by the debt management program and a monthly fee payable for the life of the plan. The interest rate savings often offset these costs, so they are never really an issue for those paying.

These costs cover the management and administration services of the plan and the correspondence between the debt management advisor and the various lenders. If you want to save costs with a free debt management plan, you may think of trying to set up your DMP yourself. However, this is a risky business as you’re not clued up on the financial aspects of debt management and may not have bargaining strength with the companies you owe money to. Remember that your financial future is at stake, and so you need to look at the value that a debt management advisor is providing. Many people consider the small monthly cost more than worth it because of the additional benefits (and peace of mind) that come with a professionally drawn-up and managed debt management plan.

The fees payable will vary between debt management companies depending on the services and support they offer.

Debt Management Plan Pros and Cons

Just like anything, a debt management plan will have its pros and cons. The main ones are highlighted in the table below. It is important that before choosing a debt management plan agency that you check the specific details of what is and what is not covered by the plan. It may seem like there are more cons than pros; however, it is clear that as long as the plan is managed and executed correctly, the pros well and truly outweigh the cons.

Pros Cons
All correspondence is taken care of on your behalf by the debt management plan agency. You won’t have to worry about being hassled by individual creditors. Interest may not be frozen (this will depend on individual creditors and the loan).
May be able to secure lower interest rates overall. The combined debt could have a lower combined interest rate than if you were to keep paying them separately. This can save you a fair bit of money in the long run. Debt management plans are informal, so creditors may still contact you directly. This can become confusing if not managed properly.
Debt management plans are flexible and can be adjusted or cancelled at any time. It’s not a legally binding contract set in stone, rather a tool to help you manage debt. Can negatively affect your credit score in certain circumstances, especially if the debt management plan is not executed properly.
There will be constant communication between yourself and the debt management advisor so you will know where you sit financially at any one time. Creditors can still take legal action if they are not satisfied with the rate of repayments.
One manageable monthly payment, so you know exactly what you owe each month. This amount should not change from month to month. You may be required to close credit card accounts. This can be a problem for those who are dependent on existing lines of credit.
Not all creditors will allow their debt to be a part of a debt management plan. Even if it is an unsecured debt, you cannot automatically assume that you will be able to consolidate it. Some creditors may simply refuse (and they are within their rights to).

Do You Qualify for a Debt Management Plan?

Not everyone will automatically qualify for a debt management plan. Each debt management plan will differ slightly depending on the amount and type of debt, but the general eligibility criteria are detailed below.

Steady Income Stream

You will be expected to make the minimum monthly repayment over several years, so you will need to ensure that you have a steady and reliable income stream. Your income will also need to be a certain amount over the minimum payment required, and consider other secured debts and financial requirements. The debt management plan agency will need to be convinced that you’re able to repay the DMP instalments and still live somewhat normally.

Not Dependent On Credit

One requirement of a debt management plan is that while you are paying off your debts, you are not allowed to open new lines of credit. So you will need to be able to survive financially without a credit card or other unsecured loans. This is the part that most people will struggle with, as dependency on credit cards is high, yet it is the very thing that gets people into trouble in the first place.

Debt Amount

The qualifying debt is not a particular number, rather a percentage. If your debt is between 15% and 40% of your annual income, then you will be considered a prime candidate for a debt management plan. This way, you will be able to afford the repayments comfortably and will be unlikely to require new lines of credit to survive.

Types of Debts

Debt management plans can only be used to cover unsecured debts. If your debts aren’t unsecured, you won’t be eligible.

FAQs

Will A Debt Management Plan Affect My Credit Score?

If done correctly, a debt management plan will not negatively affect your credit score. Because the intention of a debt management plan is for you to pay your debt in full, this is what your credit file will show. Using a debt agency to pay off the debt will not affect how this is represented on your credit score. The only risk to your credit score is if you fail to pay the monthly debt management fee, in which case your creditors will be notified and may take action against you.

While there may be a short term impact on your credit score (as there will be a notation on your credit history), this is not a long term impact.

What Happens If I Am Unable to Make the Repayments for My Debt Management Plan

The monthly repayment of your debt management plan is not negotiable – it must be paid in full every month. If you are unable to make the payment, then this means that your creditors are effectively not getting their payment. This can mean that they can remove themselves from the plan. If you miss enough payments, your debt management plan agency will no longer work with you. You will be back in the situation you were before you started.

You need to consider your debt management plan payments as important payments (similar to mortgage or rent payments). The monthly payment should be among the first thing paid from your income, as your future financial health will depend on it.

What is the Cost of a Debt Management Plan?

There will be two main costs with a DMP debt. A one-off setup fee and an ongoing monthly maintenance fee. This cost will be made evident when you start your plan, and as long as you do not grow your amount of debt (by getting new loans or adding loans to the plan), then the amount owed (and the fees) should stay consistent.

Do I Need to Include All of My Unsecured Debt?

Although there is no law stating that all your unsecured debt needs to be included in your debt management plan, it really only works properly if it is. Even if you think you can afford to keep one or two of your debts (such as a credit card for emergencies), many creditors will require that you have all of your debt included for them to agree to be a part of the plan. One creditor may become nervous if they find out that you have other unsecured debts not included in the debt management plan and may not want to cooperate. It would help if you convinced your creditors that you have every intention of paying off the loan, and the only way that you can really do that is to show them that you are serious – this is done by including every loan into your debt management plan.

Can I Open a New Credit Card or Get a New Personal Loan?

One important thing to know when you have a debt management plan is that during the life of the plan (however long it takes you to pay off the current debt), you will be unable to open new credit cards or receive any form of unsecured debt. This could be an extra incentive to pay off your existing debt faster, as there are definitely benefits to being able to have a credit card.

There are circumstances where it may be possible to open new lines of credit while you still have an active debt management plan; however, the general rule of thumb is not to. Manage your expectations and get ready to live a few years without a credit card or reliance on a personal loan.

Is There a Minimum or a Maximum Number of Creditors That can Be Included?

There is no minimum or maximum number of creditors to create a debt management plan. What is more important to consider is the amount of combined debt and whether the minimum repayments are affordable. A minimum would be 2, of course, and the maximum will be as many as you can afford to pay back in the single monthly payment. Do not let the number of creditors that you owe stop you from investigating the option of a debt management plan.

What Happens if I Lose My Job and Am Unable to Meet the Monthly Payment?

These things happen, and no income is 100% guaranteed. Unfortunately, your creditors will not be as understanding as missed payments as you hope they will be. A debt management plan only works if you can meet the monthly payment, so if you cannot pay for whatever reason, then the DMP will be dissolved. Then, you will go back to having an ordinary relationship with your creditors.

Typically creditors will drop out of a debt management plan after around 40-60 days of no payment. If you then find you can continue with payments, it can be possible for the creditor to be added back into the debt management plan; however, this can incur extra fees. (and penalties).

What Happens if I Move Overseas and Become a Resident of Another Country?

Moving abroad makes no difference to your debt management plan. Your creditors will still require their minimum monthly repayment no matter where you reside, so your payments will not change. Just be aware that your debt management plan payment will be in US Dollars, so you could lose out on the exchange rate if you start paying your monthly amount in a different currency.

Can I Set Up My Own Debt Management Plan?

While it is possible to set up your own debt management plan, there is a good reason why debt advisors and agencies exist. There are many benefits that are covered by the small monthly management fee that is added on top of the monthly debt payment, and many times these costs are more than offset by the additional benefits and savings that they provide.

Can I Get a Secured Loan While I Have a Debt Management Plan?

Because debt management plans are only for unsecured debt, they are not affected by secured debts such as mortgages and car loans. Therefore, there is nothing stopping you from getting these loans, and they will not affect your DMP payments. The only thing to consider is that they could affect your disposable income as your expenses will be higher.

Will I Still Receive Statements from My Creditors While On the Debt Management Plan?

One great benefit of the best debt management plan is transparency, so yes, you should still receive statements from your creditors. You need to check them to make sure that the payments are being allocated correctly and reflect what is owed. If there are any issues, you can contact the debt management agency directly, who will sort out any issues with the creditor. The statements are there purely to have a clear idea of what is going on, and you will be able to see the amount of debt getting lower and lower as time passes and more payments are being made.

What Happens When One Creditor is Paid in Full?

Because your debts will be for different amounts, they will likely be paid in full one by one over time. This is considered when the debt management plan is drawn up, so when one is paid in full, your repayment will not change. Rather the funds will be spread out over the other creditors to make sure that they are all paid off in full on time.