Debt Management Plan or Bankruptcy?
Summary: This paper looks at the comparison between a Debt Management Plan (DMP) and Bankruptcy exploring the similarities and differences.
A DMP and bankruptcy are 2 very different ways of dealing with debt. Both involve the breaking of a contractual agreement with creditors, but a DMP involves repaying the debt through a managed plan and bankruptcy involves personal insolvency and a legal arrangement through the court.
Advantages of a DMP
A DMP provides an opportunity for a debtor to repay their debts in a structured, organised and affordable way. Although creditors are not obliged to stop adding interest very often they do, and thus the capital is being repaid rather than just the interest. Again, creditors don't have to stop legal action, but if the debt is being repaid there is normally no need for them to do so. If the debtor is a homeowner or has other significant assets, then bankruptcy will involve these assets in any arrangement. In a DMP such assets are generally ignored because the whole debt is being repaid anyway. A DMP provides an opportunity to sort out debts without involving an insolvency solution which may be desirable for moral or professional reasons. In bankruptcy there is also the issue of an upfront fee (usually around £700) to pay to the court.
Advantages of bankruptcy
A DMP can mean that repayments will last a considerable length of time. During this time, the debtor's credit rating is likely to be poor. Bankruptcy has the advantage of being for a specific length of time - often the bankruptee is discharged after 12 months, any payment order is limited to 3 years, and the bankruptcy comes off one's credit file after 6 years. If there is little or no disposable income (i.e. the debtors income is needed to meet necessary and reasonable outgoings) then there is nothing further to pay in bankruptcy after the initial fee. Funding a DMP may be practically impossible.
Affordability
If a debtor can afford to repay their debt, albeit over a period of time, then a DMP is likely to be the right solution. However if the repayment of the debt puts great financial strain on priority outgoings such as rent/mortgage, bills, food, travel to work - then it may be that bankruptcy is necessary and will provide a fresh start. As ever, it is wise to take professional advice of best options available to you.