Introduction - a Debt Management Plan (DMP), is an informal type of agreement between an individual and his creditors. The aim of the plan is to reduce the level of debt the individual pays so that they can have one affordable monthly repayment which is facilitated by a debt management company. A DMP covers all types of personal unsecured debts such as overdrafts, credit card bills and store cards. DMP is not usually used for secured loans as creditors are highly unlikely to accept anything other than what has been agreed and secured against individual's assets. Although a DMP is not legally binding, they provide a simple and straightforward method of reducing an individual's debt burden while partially satisfying disgruntled creditors. Creditors would normally prefer to accept a reduced debt repayment than receive nothing back at all, and force a fruitless legal action against an individual. This is particularly true where the debt amount is relatively small and the legal costs of forcing pursuing the individual through the courts is high. If an individual does not have the money to repay the debt, no court can get 'blood out of a stone'.
Is a DMP a Form of 'Loan Consolidation'? - A debt management plan is not a form of a loan. Many unsecured loan companies try and advertise 'personal debt consolidation loans' to provide a single monthly repayment. This has disadvantages in that it does not actually reduce the loan amount through negotiation, (instead the period of the loan is usually extended at a lower interest rate). Also, the cost of repaying the loan early is usually extremely high. The Consumer Credit Act does provide limited protection for individuals with unsecured loans of less than £25,000. This is because lenders are not allowed to charge an individual more than one month worth of loan interest. In addition, term loans of 12-month or less means there should be no early penalty repayment charges buried in the small print.
How Does a DMP Work? - The debt management company will first collect detailed facts about the individuals income and expenses to establish any disposable income that could be used as a basis for debt repayment. The debt management company will negotiate and deal with all of the creditor communications and repayment administration. If a successful negotiation can be reached, the debt management company then distributes this single monthly payment on a pro rata principle to the creditors. The individual only deals with the debt management company. The debt management company role is to negotiate a lower level of debt with individual’s creditors and also to persuade them not to pursue the individual using formal legal channels. DMP's plans are becoming more popular as banks shy away from agreeing to individual voluntary arrangements for individuals. Critical to the success of a DMP working is the management companies' ability to assess what is realistically affordable for the individual on an ongoing basis. The creditors have to be persuaded that this lower level is realistic and sensible.
Self Managed Plans - It is possible for the individual to contact creditors and negotiate a lower level of debt on an informal basis. This eliminates the debt management fee out of the repayment profile. However, this can be extremely complicated, time consuming and would usually involve contacting multiple loan providers, who are sometimes more comfortable dealing with larger debt management companies.
Suitability of Individuals for a DMP - it is normally suitable for individuals:-
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With an affordable level of unsecured debts.
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Who do not qualify for an individual voluntary arrangement (i.e. where debt level is under £12,000).
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With unsecured debt from multiple companies.
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Seeking a simple and discreet solution.
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Equity in their property but the inability or lack of desire to take out a secured loan to raise cash to repay unsecured loans.
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Seeking to discreetly negotiate informally with their creditors or by themselves by offering a settlement.
Advantages of a DMP - the main advantages of a debt management plan are as follows:-
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No administrative charges for late or missed debt repayments.
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Reduced risk of formal legal proceedings from creditors.
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The amount of letters and contacts from creditors reduces, as the debt management company becomes the trusted single point of contact for creditors.
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One lower monthly payment which is a negotiated informal settlement.
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The payments are not linked to any secured assets such as a home.
During the Debt Management Plan - it is highly probable that the creditors will still send letters and make phone calls to an individual even though the debt management plan exists. Larger companies have formal credit control procedures and rigorous IT systems which are usually fairly bureaucratic and prompt users to send out reminders (or in some cases automatically send out invoices for payment). As a debt management plan is not legally binding, creditors are quite within their rights to send out as many communications as they want. In practice, the volume and frequency of these letters should reduce if the individuals make regular payments according to the DMP plan. Individuals should check statements from the debt management company and from the creditors to ensure that payments have successfully been made and any interest in frozen and charges frozen. It is important that any direct debits are cancelled to ensure that creditors are not accidentally paid twice. An individual's credit rating will only be affected if the creditor contacts the credit referencing agency to inform them of a missed or late payment. If they do not make any such notification, then there will be no change in an individuals credit file. Creditors may choose to send out a Default Notice for any loan or credit agreement. They are quite entitled to do this as the original terms of the loan would have been broken indirectly through the implementation of the DMP.