Debt Management Plan in UK : Some Advice on Managing your Debt

A debt management plan (DMP) in UK helps in managing your debts related to personal loans, IVA, bankruptcy or credit debts. DMP helps in managing them and offer a more affordable pay rate by reducing the monthly repayments to lenders.

It is an informal agreement made between you and the lenders to manage the non-priority debts. As it covers only non-priority debts, so before deciding to get a DMP, make sure you can cover your priority debts like mortgage, rent, and tax.

DMP can help by giving you effective solutions to pay off your debt quickly. Else, it can offer you a manageable monthly payment to pay off your debt slowly but, effectively. 

Besides, if you are opting for a debt management plan, a consultant will be appointed to deal with the creditors on your behalf.

How does the Debt Management Plan Work?

DMP is an informal debt plan and it isn’t a legal agreement. It is usually managed by debt management companies who deal with the creditor on your behalf. Although you can arrange a DMP with your creditor by yourself, still it’s best to let a known person handle it.

First, DMP analyzes all your credit dues for one or more lenders. Then after proper consultation, both parties are agreed upon a monthly installment that you can afford. This amount is paid to the management firm, who later pays all your creditors on time.

What are the Benefits and Risk of DMP?

Every financial solution has its pros and cons. Here are some benefits and risks of the Debt Management Plan to help you decide better.

Benefits of Choosing a Debt Management Plan

  • The Debt Management company will negotiate on your behalf with different lenders.
  • With DMP, you can figure out the minimum amount to pay back monthly.
  • Depending on your situation you can either increase or decrease your monthly repayments.
  • Your debt manager will distribute all your funds to the creditors on your behalf thus, saving you from any stress or legwork.

Risk of Choosing Debt Management Plan

  • Your debt management company cannot guarantee that all your creditors will reduce the monthly repayments. This might occur as DMP is not a formal agreement between the creditors. 
  • They cannot guarantee any freeze of interest on your payments. 
  • As you don’t control the money, any failed repayments from your debt company will result in court action against you.
  • Taking a DMP can affect your credit score and also affect future transactions.
  • It’s hard to find good debt management companies that offer free services. So, an extra charge towards the debt management company will result in extending the time to repay your debt.

These are the pros and cons of choosing a debt management plan for your credit dues. Hence, you need to weigh every aspect before deciding on DMP. 

Steps to Proceed with the Debt Management Plan

To set up a debt management plan, you need to do the following:

1. Manage Priority Debts 

Before you set up DMP,  manage your priority debts like mortgage, council tax, rent, etc. The debt management plan only covers non-priority debts. So, before you opt for its services, make sure you can pay your priority dues, as consequences of that can be higher.

2. Decide Which Debt Management Company to Pursue

To get neutral advice on your debt, you can contact organizations like Stepchange or National Debtline. But keep in mind that they will charge additional money for their services, which can add to your existing debt. 

3. Figure your Budget

Although a debt management company will help you figure a budget for your debts. But it’s important that you know how and from where the money would come for your repayments.

These points are important before choosing a debt management company and setting it up. As any wrong decision can hamper your credit and your future transaction with the bank.

When and How to Apply For a DMP?

There are certain criteria that should be followed while applying for DMP.

  1. Your total debt is between 15% to 49% of your yearly income when applying for a DMP.
  2. You must be Indebted to atleast 2 creditors at the same time and the total debt estimated should be atleast  £2500.
  3. The inflow of your income should be fixed. The minimum income that you have to show is £80. It is kept this way so you can pay off the debt within the minimum years if your interest rate is low.
  4. You should consider DMP if you can obtain it without opening new lines of credit at the same time while considering the plan.

If you fulfill the criteria that require you to consider a DMP, then you can apply for a debt management plan.

When you reach out to a debt management company that feels right, you can use their online debt advice tool. Else, you can speak to their expert agents over the telephone. 

Moreover, a debt company like StepChange will provide you with a personal action plan to ask for DMP with your creditors. Also, it will support you following all the instructions during that process.

Once they have all the information related to proceeding with DMP, they will contact your creditors and start your debt management plan.

Does DMP Affect the Credit Score?

The best debt management plan uk helps you to clear out your dues with effective solutions. But your credit score may get affected after opting for a DMP. 

So, having a DMP on your credit report might have a negative impact on bankers or creditors. As it could show that you were unable to repay your debts or had problems during repayments. 

Although, if you are able to prove that you paid your DMP repayments on time, this would impact positively on your creditors who may help you in the future. Your creditors can still down value your credit score as you were paying the minimum repayments with the DMP.

If you are opting for a DMP, it will remain on your credit report for a certain period of time, even after you have completed the payments. This could affect your ability to get credit during that specific period.

Things to Do and Avoid During your DMP

While repaying your debt isn’t easy, running a debt management plan over it can be stressful and can cause many problems in your life. During the process, stay calm until it last and follow these to avoid any further problems.

What are the Things to do While Considering DMP?

Here are the 5 things that you can do during your DMP:

1. Stand your Ground

While on DMP your lender might contact you less but, they may still get in touch with you from time to time. You may get an automated or personal message regarding any increase in the minimum payment. 

But, you must stand your ground with your creditors to make them remain patient with what you can offer at the moment.

2. Stay Updated

Some companies buy debts from people. This is normal during your debt collection process. As a lender, all you need to do is to stay updated and let collectors know that you are on a DMP. 

After that, get in touch with your DMP provider so that they can update the existing plan regarding the same.

3. Include all Your Debts

Make sure all your debts are included in the DMP even if you can manage other payments. As it will show your creditors that you treat every debt fairly and more likely to gain some support on your DMP.

4. Have Patience

So, maintaining the time along with consistency will definitely work in your favor to manage debts. Hence, try to make regular payments in your DMP and commit to it. This will improve the results. In most cases, this might lead to fewer calls from creditors as well.

5. Things Change

It is important to review your budget regularly to keep it real and in sync with the debt plan. However, some unexpected expenses do come up sometimes. So, make sure to inform your DMP and keep them updated about the same.

Here’s What to Avoid During Debt Management Plan

Here are the 5 things that you should avoid doing while on DMP.

1. Panic

Stay up to date with the changes and always stay connected with your DMP provider.  By keeping yourself calm and following the process, the majority of concerns can be resolved.

2. Extra Payments

Making additional payments than the minimum amount might suggest to creditors that you got extra money to pay off debts. If you can afford to pay extra, then review your budget and minimum repayment by your DMP provider.

3. Push Your Limits

If you are unable to pay the minimum amount set on the DMP plan, then let your provider know about it. As they can come up with plans that can make things easier to deal with.

4. Finding Answers on Web

If you need any advice, talk to your DMP provider rather than searching for unnecessary post regarding it on the web.

5. Prioritizing DMP Payments

Prioritize your priority payments first, as they have far worse consequences than DMP payments.