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Debt Management Plan or a Debt Relief Order?

Summary: This paper looks at the comparison between a Debt Management Plan (DMP) and a Debt Relief Order (DRO) exploring the similarities and differences.

Both DMP's and DRO's provide solutions for those unable to meet the contractual repayments of unsecured debts. However there are significant differences.

What is a DMP?

A DMP is an informal repayment plan, where the debtor combines their debt and repays it with one affordable monthly payment. A DMP company can often arrange for interest or other charges to be stopped, allowing the debtor to repay the capital owed rather than just servicing the interest. The whole debt is repaid but over a period of time.

What is a DRO?

A DRO is a form of insolvency where the debtor has debts frozen and subsequently written off. It's a form of bankruptcy for debtors with less than £15000 of total unsecured debt. To qualify the debtor needs to demonstrate they have less than £50/mth available for debts after normal household and personal expense are met. Furthermore they can't apply for a DRO if they have savings of over £300 or own a vehicle worth more than £1000.

Which is right for me?

If your total unsecured debt is less than £15000 then there may be a genuine choice to make. Working out your disposable income is an important step. This involves adding all sources of income and subtracting all necessary outgoings. The resulting figure is called your disposable income. If this is less than £50/mth then a DRO may well be a good solution. However notice of the DRO will be registered on your credit file for 6 years - just the same as bankruptcy

Will my circumstances change?

In a DRO - the debts are frozen for 12 months and creditors are prevented from taking further action. At the end of this period if your circumstances are unchanged then the debt is written off. However if there are financial changes and the disposable income has increased then the DRO will finish and a repayment plan will be required. If this is a likely scenario, then it may well be better to avoid a DRO - and make token payments to creditors until the change of circumstances allows for a DMP to start

The above is provided as information only. Iva.co.uk does not provide debt advice. You must always seek professional advice before taking any action to resolve your debts.