Is a debt management plan right for you

Is a debt management plan right for you

A debt management plan lets you reduce your monthly debt payments so they are affordable. It gives you a breathing space until your income improves. In some circumstances it might be a better option than an IVA.

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How does a debt management plan work?

A debt management plan (also known as a DMP) allows you to lower your unsecured debt payments. Your creditors agree to assist you by reducing the payments they are prepared to take from you each month.

The Plan is informal. This means you are not bound by many of the legal restrictions of an IVA.

You have much more flexibility. For example, you can leave a debt out if you want, and continue paying it in full. You can also pay off one or more of your debts more quickly while leaving others in the plan.

Most creditors will accept a DMP if you can show them you are in financial difficulty. You can negotiate the Plan yourself or get a debt management company to help you.

When should you do a debt management plan?

There are a number of reasons why you might be better off using a debt management plan rather than an IVA.

It is a particularly useful solution where your income is likely to go up in the short term or you are expecting a windfall. In a DMP, you can chose what to do with this extra money. In an IVA it would have to be paid into the arrangement.

Another is where you can pay off your debt in a reasonable period of time. If based on the reduced payments, you can still pay what you owe in 5 years or less, there may be no need to use an IVA.

If you are a home owner you may not want to touch any of the equity in your property. You don’t have to in a debt management plan. In an IVA you are obliged to release equity if you can.

Where you have already moved abroad, you may no longer qualify for an IVA. A DMP is still an option for you.

What are the disadvantages?

If you use a debt management plan, all your debt has to be paid in full. Unlike an IVA, there is no agreement to write off any of the money you owe. As such unless you expect your income to go up or that you will get a windfall in the short term, it could take a long time to become debt free.

Because it is an informal agreement, your creditors can still add interest and charges. If they do the time it takes to pay what you owe will grow even longer. That said, interest is often frozen if your Plan is implemented using a reputable company (even on credit cards).

The Plan does not give you legal protection. So one or more of your could still decided to take action against you. They can still apply for a CCJ or attachment of earnings against you, or a charging order against your property.

In addition, you may think your credit rating will not be affected if you start a DMP. This is not the case. In most cases it is affected in the same way as an IVA.

Want more advice on whether to start a DMP or IVA? Give us a call (0800 011 4712) or complete the form below and we’ll call you.