Why would creditors agree to a Debt Management Plan (DMP)?
Summary: Why would creditors agree to a Debt Management Plan (DMP)? - This article explains why creditors may be willing to accept DMP's which involve reduced payments and often, frozen interest charges.
What is a DMP?
A DMP is an informal, structured plan to repay unsecured debts but at an affordable rate, usually involving one monthly payment through a DMP company to the creditors, each receiving their share of that monthly payment according to the size of their debt.
Creditors and reduced payments
Creditors are not going to accept reduced payments without good reason. A debtor who phones up a creditor and asks for reduced terms and frozen interest is unlikely to find instant success. Otherwise we'd all do it! If you have just 1 or maybe 2 creditors it may be possible to make an arrangement directly with the creditors. For some people any kind of meaningful repayment is out of the question and the best they can do is offer each creditor a token payment - ass little as £1/mth is better than nothing.
However in a DMP - creditors are being asked to accept a reduced payment for potentially a long period, and furthermore it will be hoped that they will stop adding interest/charges.
What's in it for the creditors?
Make no mistake, creditors want their debt repaying, and they want to keep adding interest charges for carried over debt (on cards, catalogues etc). However they are aware that changes of circumstances for one of their customers may make this impossible. Then it's a question of what makes best financial sense for them. Each year, each lender has to write of millions of pounds of bad debt. People "disappear", or simply refuse to pay. Often legal action is expensive and fruitless for the creditor, as the debtor can't pay what they don't have. Furthermore some debtors will themselves decide to go for bankruptcy or an IVA, resulting in the loss of all or some of the creditors' capital owed. Therefore a plan where the creditor can see that the debtor is doing all they can to repay the whole debt, is likely to be received favourably
Ultimately creditors have to make decisions regarding the best way forward in specific circumstances. The cost of having to pursue a bad debt has to be weighed against the possible gain. Creditors will certainly do all they can to recover their debt but may have to sell the debt on at some point. Therefore a plan that enables the whole debt to be repaid has obvious appeal.