What is a debt management plan (DMP)?

Debt Management

What is debt management?

Debt Management Plans are provided by debt management companies who negotiate with your creditors to change your debt repayment terms. Debt Management Plans (DMPs) can be a good debt solution, especially if your problems are likely to be short term. Increasingly, especially if you don't owe very much in total, creditors may ask you to try debt management before being considered for an IVA. If you'd like to see how this might work for you or if you want to compare IVA and Debt Management options you can use our new, simple comparison tool.

A debt management plan can be put in place by a debt management company or made by yourself ("self help debt management"). Sometimes commercial and charitable debt management plans are simply a step on the road to bankruptcy, offered to debtors who are terrified of the word insolvency. However in many circumstances they can be an appropriate solution, especially if you can nearly pay all your debts or if you strongly believe your problems will be short term.

Debt Management Companies

Commercial debt management is similar to self help debt management except that someone else is doing it for you. There are many different firms offering this service and most charge a fee. Some are overtly commercial; some (even a major charitable one) are funded by the banks and credit card companies themselves.

Debt Management

Debt management firms will usually ask you to pay them as much as you can afford. They may negotiate with your creditors to accept lower repayments or obtain interest freezes.Commercial Debt Management companies are often able to do this - it isn't only the debt management charities that succeed here. They pass the money to your creditors less their initial and, then, monthly fee. This is usually around 15%-18%.

Self help debt management

Self help debt management essentially involves you renegotiating your payment terms with your creditors. If your debts are not so serious and you approach your creditors first to deal with your problems you will usually find them sympathetic and helpful to you. If you leave the debt management process until they threaten to take action against you it is often much harder to negotiate with them. You need to be tough to negotiate a good deal - often; they will refer you to a debt management organisation in any case.

Take care though; some of the debt management plans we have seen, even from the more public-spirited providers, are scheduled to last more than 10 years and often only reduce debt by small amounts, compared with an IVA which, usually on a very similar monthly payment, ensures you are debt free, more often than not in five years.

More information:

Debt Management Advantages and Disadvantages

Advantages of debt management

Debt management involves an informal arrangement that avoids the need for formal insolvency procedures such as an IVA or bankruptcy.
By reaching agreement with your creditors this may suspend action against you such as CCJ’s.
Your monthly debt repayments may be reduced.

Disadvantages of debt management

The arrangements are informal so your creditors can change their mind at any time.
Your credit rating may still be harmed
While such arrangements reduce your monthly repayments to make them affordable it usually means you are paying more in total over a much longer period.
Interest will usually continue to be charged on your debts particularly on your arrears which may be charged at higher rates than your original loan rate.
Unless your debts are less serious you could end up in debt for a very long time. In the worst case you may find you have no real prospect of getting out of debt and becoming debt free.

Links to related ClearDebt articles:

Debt Management Advantages and Disadvantages

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