Debt Management Plan

What exactly is a Debt Management Plan?

Debt Management Plans (DMP) are informal agreements between you and your creditors. They are not legally binding and therefore your creditors can withdraw from the plan at any time if you default with your payments but it is not normally in their best interests to do so.

A debt management plan will alleviate the pressure of multiple creditor pressure, legal action, bailiff attendance and ultimately bankruptcy, spreading your debts over a longer period of time, rather than having to find a lot of money right now.

Making negotiations with your creditors ought to be the first thing that you do.  However, not all creditors listen to or consider the needs of the individual.  Unlike Bankruptcy and in most cases with an IVA, this is not court-led.  The risks involved in this method are that there is no debt forgiveness.

Creditors are not obligated to accept any percentage in Full and Final settlement, they are not obligated to freeze interest whilst you attempt to discharge our debt to them.  Further, should they decide a day to three years in that they no longer wish to be bound by any terms that you have agreed to, they simply can instigate insolvency proceedings against you and you will be rendered powerless, unless of course, you are able to pay them in full.  However, should you be made bankrupt within 6 months of doing so, you leave yourself open to criticism for preferring one creditor over another and penalties may be awarded against you.

How is a Debt Management Plan different to an IVA?

If you have debts and arrears of more than £2,000 but less than £15,000 you can enter into a Debt Management Plan.  A Debt Management Plan can only offer you minimal protection against your creditors (people you owe money to).

Debt Management is an alternative to the possibility of being made bankrupt by your creditors and is a far easier solution for you to consolidate all your financial obligations into one simple monthly amount and is also a responsible pro-active solution to dealing with your financial affairs.

However, as a DMP is not legally binding it has no influence on your credit rating, however if you are at the stage of considering or needing a Debt Management Plan and presumably several payments have been numerously missed so far, your credit rating is already worthless, and therefore a DMP should not be rejected as a debt solution for this reason alone.

Mortgage arrears and other secured loans can be added to a Debt Management Plan.

Interest and on-going default charges can usually be frozen but this is solely at the discretion of the creditors and also depends on the type of debt (a credit card company will not normally freeze interest as this is how they make their money).

Debt Management Plans do not write off any amount of your debts, they simply decrease the monthly amount payable and increase the number of remaining payments significantly.

In an IVA on the other hand, there is no upper limit/ceiling to the amount of debt that one can have.

Creditors are bound by the terms and conditions of the IVA once it is in place and interest is frozen on all debts.  Upon completion of the IVA after usually five years, the debts are considered concluded and therefore should there be any remaining debts (not a payment in full), the remaining debt is written off.

Debt Management companies have come under scrutiny recently and their controlling body DEMSA have revoked several licenses due to rogue behaviour, usually surrounding their percentage fee which they charge each month from the agreed repayments or due to their aggressive selling of their product, especially in circumstances when other debt solutions would have been far more advantageous to the Debtor.

IVAs are controlled by licensed Insolvency Practitioners, who are officers of the court and should they suspect foul play will fail the IVA and the Debtor could be facing Bankruptcy, imprisonment and/or a fine.

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