A Debt Management Plan (DMP) allows the client to repay what they can afford to their creditors on a monthly basis. This is a repayment plan that allows the client to repay their debts on a pro-rata split, according to how much money is owed to each creditor. Payments are distributed to the creditors on a monthly basis through the Debt Management Company (DMC). For further reading, DIY Debt Management Plan.
Advantages of a Debt Management Plan
A debt management plan (DMP) is a repayment plan that is typically used by individuals who are struggling to repay multiple unsecured debts, such as credit card debt, personal loans, and medical bills. The main advantage of a DMP is that it can help individuals to repay their debts in a more manageable and affordable way. Some of the specific advantages of a DMP include: Also, if you are content being in a DMP for a very long time and only paying a creditor a token amount, then this could be for you.
- Lower monthly payments: A DMP typically involves consolidating all of an individual’s unsecured debts into a single payment that is lower than the total of their current monthly payments.
- Reduced interest rates: A DMP may involve negotiating with creditors to reduce or even eliminate interest charges, which can save the individual money in the long run.
- Creditor harassment: Once the DMP is in place, the individual’s creditors are typically prohibited from contacting the individual to collect the debt, which can provide relief from the stress of constant phone calls or letters.
- Debt-free: After completing a DMP, the individual will be debt-free and no longer have to worry about repaying the debts that were included in the plan.
- Credit Score: DMP will not have any negative (maybe) impact on credit score, as long as the individual makes their payments on time and as agreed.
- Professional Assistance: DMPs are typically administered by debt help agencies or other organizations that provide financial education and counselling services, which can provide the individual with valuable support and advice throughout the process. However you can do your own DIY Debt Management Plan.
Disadvantages of a Debt Management Plan
While a debt management plan (DMP) can be a useful tool for managing unsecured debt, there are also some disadvantages to consider. Some of the main disadvantages of a DMP include:
- Lengthy repayment period: A DMP typically involves repaying the debt over a longer period of time than other options such as debt consolidation loans, which can result in paying more in total interest over the life of the debt.
- Credit score: While a DMP may have a negative impact on credit score, as long as the individual makes their payments on time and as agreed, it will be noted on the credit report that the person is on a DMP and this may be viewed negatively by some lenders.
- Limited to unsecured debts: A DMP can only be used for unsecured debts such as credit card debt, personal loans, and medical bills, and not for secured debts such as mortgages or car loans.
- Limited control over the plan: A DMP is typically administered by a credit counselling agency or other organization, which means that the individual has limited control over the terms of the plan and may not be able to make changes as their financial situation changes.However you can do your own DMP for greater control.
- Fees: Many organizations that administer DMPs charge a set up fee and a monthly fee for their services, which can add to the cost of the plan.
- Creditor may not agree: Creditors are under no obligation to agree to a DMP, and if they do not agree to the terms of the plan, it will not be possible to move forward with the DMP..In most cases though, eventually a creditor will agree to a DMP.
How Do Debt Management Plans help?
Debt management plans allow the client to pay smaller, more manageable payments to each creditor by monthly payments to the Debt Management Company, who will then distribute the funds to each creditor on a pro rata split. In many cases they will be able to freeze or reduce the interest on the accounts. You can also as mentioned above put yourself into a DMP
Financial Fact Find Debt Management Plan
The financial fact find is a breakdown which assesses the client’s financial situation. Monthly income and expenditure is recorded, as well as the total amount the client owes to all the individual creditors. The financial assessment shows how much each creditor will get on a pro-rata split, according to how much they owe each creditor.
Priority Debts in Debt Management Plan
DMC’s should also be able to negotiate reduced payments for priority debts. Obviously priority debts are more important and will be given a higher priority in the negotiation process. Priority debts are debts that have a serious consequence if left unpaid e.g. Council Tax, Rent Arrears etc.
How will my credit file be affected if I enter into a Debt Management Plan?
It is not the DMP that will affect your credit file; rather it is the impact of missed/insufficient payments that will have a negative impact. This is because the contract entered into at the time of agreeing to the credit facility has not been honoured, taking this into account, by the time a client starts a DMP , the damage has already been done to their credit file.