What are the drawbacks of a Debt Management Plan (DMP)?
Summary: This article explores the potential disadvantages / drawbacks that a Debt Management Plan (DMP) can bring.
Disadvantages of Debt Management Plan (DMP)
Breaking a contractual agreement
When debtors can no longer afford to repay their debts at the agreed level, then they are breaking a contract and this has consequences. Creditors can take legal action and can issue default notices which outline the nature of the broken agreement and possible courses of action that will follow.
One of the immediate consequences of not meeting repayments is that our credit rating will suffer meaning that any future credit will be much harder to obtain. A DMP which is an informal repayment plan will not prevent this from happening. Once a default notice has been issued it will stay on the credit file for 6 years.
No legal assurances
Although the vast majority of DMP's provide an opportunity to repay their debt in a structured way, creditors are not under any legal obligation to stop further action. This could involve passing the debt on to a debt collection company or applying to the Court or a CCJ (County Court Judgement). A creditor may follow up the CCJ with a charging order on any property owned, which effectively secures the debt on that property.
Interest may still be added
It is worth noting that many DMP companies successfully negotiate with creditors in a DMP to stop future interest charges. Clearly without this, the debtor may have prevented legal action by the creditor but the debt is unlikely to decrease with interest still being added to the debt. In this case, the debtor would be wise to look at all other options to bring the debt under control.
Fees to pay
The majority of DMP companies charge a fee to set up the DMP and manage the debt. Thus not all of the monthly payment is being paid to the creditors. There are a few companies that do not charge, but are also unable to provide the level of customer service that some of the fee-charging DMP companies can provide. It is worth finding out exactly how much of the monthly payment is going to the creditors, and if fees are to be paid - what kind of service level the debtor is paying for.