There are a number of tools we can use to help get out of debt now. One of them is the Debt Management Plan (DMP).
A Debt Management Plan is a formal (but not legally binding) agreement for non-priority debts such as credit cards, store cards, overdraft or a personal loan.
You’ll need some spare cash to make regular payments to each creditor to be able to arrange a DMP. Otherwise it’s a very simple and effective way to manage debt.
What is a Debt Management Plan?
A Debt Management Plan is an agreement that you make with your creditors to pay them back over time.
It’s not a legal agreement but most creditors will abide by it if you work through a debt charity or similar organisation.
It’s a negotiated plan to pay back your debts at a lower rate than is standard.
For example, if your debt payments are £120 per month and you just can’t afford it, a Debt Management Plan can arrange repayments of £40-50 per month over a longer period of time.
Any interest related to the debt is usually frozen and won’t continue to build up, giving you the space to breathe and to pay down what you owe.
What debts can you pay with a Debt Management Plan?
Debt Management Plans are for non-priority debts. If you read ‘Priority and non-priority debts – What’s the difference?’, you’ll know that priority debts can change your life, like a mortgage, rent, council tax and so on.
Non-priority debts are those that won’t impact your life in such fundamental ways. Debts like credit cards, store cards, overdrafts and so on.
Defaulting will impact your credit score and perhaps result in legal action but won’t cause you to be homeless or face jail time.
Non-priority debts include:
- Credit cards
- Overdrafts
- Money borrowed from other people
- Store cards
- Unsecured personal loans
- Payday loans
- Water or broadband
- Catalogues or buy now pay later agreements
There are many types of credit available and most of them will be non-priority debts that can be managed by a Debt Management Plan.
How do you get a Debt Management Plan?
You can discuss Debt Management Plans with debt charities and free debt advice organisations.
There are companies out there that will offer to help you for a fee, but there’s no need to use those.
Donate to the charity if you can afford to, but don’t pay a company for this type of service.
First you’ll need to discuss and decide whether a Debt Management Plan is the right solution for your situation.
That’s not something I can do on Saving Superstar so I strongly urge you to seek professional help.
Discuss your situation honestly and work with the organisation to come up with a recovery strategy.
That may, or may not, include a Debt Management Plan.
What are the consequences of a Debt Management Plan?
A Debt Management Plan will likely impact your credit score as it changes repayment arrangements
Make all your payments and a Debt Management Plan won’t specifically be mentioned on your credit history
If you miss a payment before, during or after your Debt Management Plan, it will definitely impact your credit score.
Missed payments will remain on your credit history for up to 6 years, so defaulting should be a last resort.
Debt Management Plans and you
A Debt Management Plan isn’t for everyone or every situation. It can help a lot of people in a number of ways but it does have consequences.
I would urge anyone facing debt issues to work with a debt charity to help you regain control.
Follow their guidance and advice on whether a Debt Management Plan is the right tool for you or whether you should consider something else.
They are the experts after all!
