What does a debt management plan do?

With the allure of using credit cards and loans to deal with unforeseen challenges life throws at us, many people in the UK find themselves facing mounting debts. Owing a substantial amount of money is never easy, especially when fees and interest start to pile up.

Debt Management Plans (DMPs) are one of many potential solutions to this problem, offering a structured and more manageable approach to monthly repayments. But what is a DMP, and how does it work? In this article, we’ll explain what debt management plans do, what they don’t do, and how to decide whether they’re the right debt solution for you.

Understanding debt management plans

Debt Management Plans (DMPs) offer a systematic approach to dealing with debt, making repayments simpler and less overwhelming. They can be a helpful tool for anyone who owes several non-priority debts, such as unsecured loans, credit card debts or unpaid parking tickets (if they are from a private company).

The DMP provider will calculate how much you owe and can afford to pay each month, using this information to create a tailored repayment plan. You then send them a fixed amount each month, which they split between your creditors.

DMPs can be a great help in managing your money, but they are not necessarily the right solution for everyone. It’s important to understand the pros and cons and consider your unique financial situation.

What does a DMP do?

A debt management plan (DMP) aims to help you get a handle on your debt, alleviating the stress and uncertainty that can come with juggling several repayments each month. Let’s break down how a debt management plan works.

01. It consolidates your monthly repayments

One of the primary advantages of a DMP is that it consolidates your monthly payments into one. Instead of keeping track of various creditors, due dates, interest rates, charges and amounts, you’ll have one monthly payment. This payment is calculated based on what you can afford.

Not only can this reduce the mental strain of managing multiple accounts in arrears, but it can also help you to budget and keep track of your finances.

02. It gives you longer to repay your debt

Most debt management plans allow you to spread out the debt by extending it over a longer repayment period. This means that each monthly payment becomes smaller and more manageable, ensuring you don’t stretch your finances too thin. It’s important to bear in mind that this means you’ll be in debt for longer, and you may end up paying more in interest over time, unless your interest has been frozen.

03. It reassures your creditors

Being proactive about your debts can signal to your creditors that you’re becoming more financially responsible. When they see that you’re on a DMP, they will typically recognise your commitment to settling your obligations, even if you’re only repaying a small amount each month. This could potentially lead to more lenient terms and better relationships and discourage your creditors from taking legal action to pursue the debt. DMPs are not legally binding, however, so this isn’t guaranteed.

04. It can stop interest and charges accumulating

One of the significant challenges when you owe money is the interest and charges that build up over time, adding to your debt. When you take out a DMP, the company will contact your creditors and see if they’re amenable to arranging more favourable terms.

While your creditors are not legally obliged to negotiate, they’ll often agree to freeze or reduce the interest rates and fees on your account, helping to prevent your debt from spiralling out of control.

05. It removes the hassle of dealing with creditors

From making phone calls to responding to endless letters and emails, liaising with creditors can be overwhelming and anxiety-inducing – not to mention time-consuming, especially if you’re dealing with several lenders.

With a DMP, the managing provider typically handles all communications, negotiations and distributions of funds on your behalf, allowing you to focus on your financial wellbeing without the added stress.

What does a DMP not do?

It’s important to understand that DMPs are not one-size-fits-all solutions. While a debt management plan can be extremely helpful in many ways, there are certain things it cannot do.

01. It doesn’t cover your priority debts

While a debt management plan (DMP) can be used for most non-priority debts, they don’t address priority debts. These are debts that could cause more serious problems if they are not repaid, such as wage deductions, losing your home or going to prison. For example:

These types of debts won’t be included in your DMP, meaning you’ll have to continue repaying them separately.

02. It doesn’t guarantee your creditors will cooperate

Most creditors are familiar with DMPs and recognise them as an earnest effort to repay debt. However, they are not required to negotiate with – or even talk to – your debt management company. Some creditors might not agree to the proposed repayment terms or may not be willing to freeze your interest or charges. It’s essential to be prepared for such scenarios.

03. It doesn’t protect you from legal action

Being on a DMP shows commitment and can help you to manage your finances, but it is not a legally binding debt solution (such as bankruptcy and Debt Relief Orders). This means that you won’t be protected from legal action being taken against you. Even if you’re making your monthly DMP payments, your creditors still have the right to send debt collectors to your home or take you to court if you’ve broken the original repayment terms.

04. It doesn’t necessarily save you money

While DMPs can make your monthly payment more affordable, this doesn’t necessarily mean that you’ll pay less in total. If the repayment period is extended, you may end up paying more over time, due to accumulated interest, if it is not frozen, and the fees charged by the debt management company. It’s essential to weigh the immediate relief against the long-term financial implications.

05. It doesn’t stop you accumulating further debt

A DMP can help you to handle your existing non-priority debts but doesn’t prevent you from accumulating more debt. For example, it doesn’t stop you from taking out new loans, falling into mortgage arrears, or continuing to use a credit card that isn’t included in the DMP. It’s crucial to understand and address the underlying reason for the debt, and be cautious about borrowing more money, as it could complicate your financial situation further.

Looking for debt advice? Contact DFH today

DMPs offer numerous advantages, but they’re not the right choice for everyone. Before committing, it’s essential to assess your finances, understand the implications of a DMP, and consider whether an alternative arrangement might suit you better. Seeking expert advice can help in making an informed decision.

At DFH Financial Solutions, we’re committed to helping individuals find tailored debt solutions and regain control of their finances. If you’re considering a debt management plan (DMP) or want to know whether it could help you, apply online or contact us today. Our team of experts will be there to guide you every step of the day.