How does a Debt Management Plan (DMP) work?
Summary: This article explores the circumstances in which a Debt Management Plan (DMP) may be advisable and the practical implications of starting one.
Understanding the problem
Many people are repaying their unsecured debts with money they haven't got, and are finding that due to the need to take out further credit to live combined with the interest added to the debt, that their debt is actually increasing despite the regular payments. Without further action, some people will find the debt repayments literally lasting the rest of their lives. This realisation, or the credit supply running out, prompts people to look at options open to them
Is a DMP right for me?
Some people are able to utilise assets (releasing equity in a property) or have family that can help. But for the majority, we need a debt solution that is going to solve the problem of our debt. For some, it's a question of insolvency - bankruptcy or an IVA - which have their own implications for the debtor. But if these solutions are not available or desirable, then the debtor has to repay their debt. The question is how? Assuming that insolvency is not the answer, then a DMP will allow the debtor to repay their debt with one affordable monthly payment to cover all their debt repayments
When you contact a DMP company (and there are lots to choose from!), you will be asked certain questions. It's important to have as much information as possible regarding debts, income, outgoings and assets. Rather than repaying the debts and then trying to live on what's left, the DMP involves looking firstly at how much is needed for the debtor to meet all necessary bills and living costs. Once it is established how much the debtor needs to live on, the remaining income is available for debt repayments. Assuming this is not enough to meet contractual repayments, then a DMP is likely to be the way forward.
The DMP company will put the plan together, and communicate with the creditors, showing each creditor the overall position of debts, income/outgoings etc. The debtor would stop paying contractual payments, maybe open a new bank account, and start making the agreed monthly payment to the DMP company, who will distribute the payment between the creditors. Furthermore the creditors may well agree to freeze interest charges to allow the debtor to make the plan work, as reduced payments with normal interest added would see the debt total increase and the debt never paid off.