Advantages and Disadvantages of Debt Management Plans
Are you thinking about ways to solve your financial problems? What you may need is a Debt Management Plan (DMP). Let us take a look at the advantages and disadvantages of a Debt Management Plan.
A typical Debt Management Plan allows you to consolidate eligible unsecured debts into a single and more affordable monthly repayment. This is then paid to your creditors on a pro rata basis over an agreed period of time.
The amount you can afford to repay to your unsecured creditors is determined after deducting from your income:
- The amount you have to pay towards your priority debts (i.e important commitments like mortgage, utilities, and council tax)
- The cost of living (i.e. food, petrol, clothes etc)
This should ensure that that you do not get into arrears or even miss payments to your priority debts.
What to consider
A Debt Management Company (DMC) will approach your creditors to advise them of your circumstances and highlight the advantages to them of accepting your pro rata payment offer. This will include requests to stop any interest and charges and to not take any legal action against you.
Whilst it is unlikely that your creditors will take legal enforcement action against you while you maintain your debt management plan payments, the issue of freezing interest and charges is much more difficult, and can depend on your debt levels, how long you have had your debt and the identity of your creditors.
It is unlikely that your creditors would agree to the freezing of interest and charges immediately once you commence your plan, but we would expect to see some results after you have maintained your plan. Unfortunately, nothing can be guaranteed.
This can often be the biggest drawback of a DMP. If your monthly payment net of fees does not exceed your monthly interest and charges, then your debt could increase in the short term. So whilst you benefit from a reduction in collections activity from your creditors, your debts can increase.
Even if this is the case, your Debt Management Plan may still be the best solution for you. Further borrowings may not be available to you, you may not be eligible for an IVA and you may have some equity in your home that you want to protect from the effect of bankruptcy. The issue is therefore, that whilst a DMP may not be perfect it is a demonstration to your creditors that you are serious about repaying your debts and you should consider your plan as a short term option.
If you are repaying more than then interest and charges and you are repaying to your debt, you will know how long it will take you to repay your debt in full. This allows you to consider DMP as a longer term solution.
Before settling on a DMP, consider these few factors:
- Make sure that you use a fully licensed debt management company.
- Ensure the debt management company is ethical and has discussed all other options.
- Understand whether your debt management plan is a short or longer term solution.