Debt Management Plans that don't work
Summary: This paper looks at the circumstances that surround a Debt Management Plan (DMP) that doesn't work well and consequences that follow.
Effective DMP's
When debtors cannot reasonably meet contractual repayments on their unsecured debts a DMP is likely to be an effective way of repaying the debt and preventing legal action from creditors. Such action can be costly and unproductive and if a reasonable attempt is being made to repay the debt then a DMP is highly likely to work well. However this is not guaranteed.
Refusing to freeze interest
Creditors can't make people pay what they don't have. Despite the threats there is a limit to what creditors will be willing to do to recover the debt. However they can pass the debt on to debt collection companies or pursue the debt through the court which could lead to County Court Judgements and then attachment of earnings, bailiffs or even bankruptcy. However one way they may express their dissatisfaction with a DMP is to refuse to freeze interest charges with the result that the debt may be increasing despite the DMP payments.
Problems with a DMP
Very often creditors appreciate that the DMP is a necessary solution to circumstances that a debtor finds themselves in and agree to freeze interest and accept reduced payments. However there are certain situations that are more likely to create problems within a DMP. One of these is a lack of honesty or openness. Creditors will want to see an income and outgoings analysis. If they have reason to believe the income figure is inaccurate or the outgoings contain non-essentials, they are more likely to raise objections.
Missing payments
Another problem can be missed or erratic payments. Creditors may agree to the plan in good faith, but if the plan is not adhered to they are more likely to feel the debtor is not taking the plan seriously and take further action. Creditors also want to see the plan is being fairly administered by the DMP Company so that each creditor is receiving their proportionate share of the repayment amount and with regular, on time payments.
Further credit
Finally, creditors are unlikely to welcome further use of credit by the debtor. It may be that an old debt is discovered or surfaces that is added to the plan. But if new credit is taken out and creditors become aware of it, it is quite possible they will take exception to this and take further action.