What is a Debt Management Plan (DMP)?
Summary: This article explains the idea behind a Debt Management Plan (DMP) and the necessary features of a DMP.
Definition of a DMP - What is a Debt Management Plan (DMP)?
A DMP is an informal but structured plan allowing a debtor to repay their unsecured debts in a managed way. Occasionally, debtors are able to come to repayment plans directly with their creditors thus managing the plan themselves. However it is customary to refer to a DMP as a repayment plan managed by a third copy, commonly known as a DMP company.
The problem with debt
People find themselves unable to manage debts for all sorts of reasons. Some labour on, repaying credit but then needing to use credit again in order to meet priority payments (mortgage/rent, council tax, utilities, food, travel) and to live properly. Others miss payments and find that they face a barrage of communication from creditors. There comes a point though that many people realise they need a plan to sort out the debt.
How does a DMP work?
A DMP will involve breaking the contractual terms of the particular debt in the plan. Instead of making the required payments, a DMP allows the debtor to demonstrate to their creditors that the contractual repayments are not affordable. A list of all unsecured debts is required as a starting point. Next - an understanding of all forms of income, and then a list of all priority and reasonable household expenses is produced. The difference between total income and total outgoings is known as a person's disposable income. This is the amount they have to pay back on their debts.
Following a period of unemployment, an individual added to his existing unsecured debts, and on returning to employment had amassed £8000 of credit card debt. Income is £1200/mth - but the cost of rent, bills, food, travel plus extras for phone, social etc came to £1100/mth. The minimum repayments on the credit cards are £225. The debtor cannot effectively meet these payments and decides to start a DMP at £100/mth meaning he no longer needs to use further credit.
In a DMP the debtor usually makes the one monthly payment to a DMP company who then distribute that payment between the creditors, so each creditor receives their proportionate share of that payment according to the size of their debt relative to the total debt. This is an informal arrangement and creditors are not bound to stop further action. Very often however, creditors will accept that under the circumstances, the DMP is the best way to recover the debt.