How does a debt management plan work?

December 4, 2017

A debt management plan (DMP) is an agreement between you and your creditors to pay back the money you owe, at a more affordable rate than the original contractual terms allowed.

Unsecured debts including personal and payday loans, overdrafts, credit cards and store cards, can be included in a DMP, and are repaid from your surplus income. The DMP provider helps you budget so you’re not over-committed financially, and also distribute payments to your creditors each month.

How a DMP works in practice

Initially, you need to provide detailed financial information to your specialist adviser, who establishes how much you can comfortably afford to pay your creditors. This amount is calculated by deducting all your essential living costs from the total monthly income figure

These living costs include, but are not limited to, mortgage/rent payments, rates, gas, electricity, water bills, criminal fines, arrears of child maintenance, tax and National Insurance, and money judgments.

Once a DMP is set up, the provider receives the payment and distributes it to your creditors at the agreed rate. Creditors don’t have to accept this new repayment amount, however, and some may continue to contact you for more money.

Advantages of a Debt Management Plan

  • A DMP helps you regain control of your financial situation, and avoid potential bankruptcy
  • You can budget more effectively with the help of a financial expert
  • Your professional adviser deals with creditors, and distributes payments
  • You may be able to pay a lower interest rate on your debts
  • Your debts are cleared in full at the end of the debt management plan

Drawbacks of entering a DMP

  • Creditors aren’t obliged to agree the plan. Some may continue to chase you for payment, or refuse to freeze the interest and charges on their debt, which means you’ll pay more in the long-run.
  • A DMP will appear on your credit file, and is likely to prevent you from accessing further borrowing or credit for some time
  • Secured debts aren’t included in a DMP – you need to continue payment of these as normal
  • There’s no legal protection with a DMP – it’s not a formal agreement, and a creditor can withdraw from it at any time

Is a debt management plan right for you?

A DMP may be suitable if you have surplus income at the end of each month. It’s important to ensure you can afford the agreed repayments over the long-term, however, as it’s unlikely you’ll have access to any further credit or borrowing whilst the DMP is in existence.

If you don’t have any income left after your essential household bills, a debt management plan isn’t the right debt solution for you, but there may be others more suitable. None of your debt is written off with a DMP – you continue to make the agreed payments until your creditors have been repaid in full.

If you feel your unsecured debts are no longer manageable, Northern Ireland Debt Solutions can help you regain financial control. We provide professional assistance to residents of Northern Ireland who are struggling with debt. Call our Belfast office to speak to our licensed insolvency practitioners, and arrange a free same-day consultation.

Lawrence O'Hara

Insolvency Adviser

Tel: 028 2132 6269

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