If you're struggling to keep up with debt payments on things like credit cards, loans and store cards, a debt management plan (DMP) may be right for you.
This page explains what a DMP is, how it works and what you need to think about before getting one.
What are priority and non-priority debts?
Priority debts include:
mortgage or rent arrears
gas and electricity arrears
council tax or rates arrears
magistrates' court fines
arrears of maintenance payable to an ex-partner or children
income tax or VAT arrears
TV licence or TV licence arrears.
They're called priority debts because the consequences of not paying them can be more serious than for other debts. You usually can't include these debts in a DMP - check with the DMP provider. You'll need to choose another debt solution for your priority debts if you can't put them in a DMP.
Non-priority debts are less urgent and include things like bank loans, credit cards, student loans, water charges and benefits overpayments.
What is a DMP?
A DMP is an informal agreement between you and your creditors for paying back your debts.
You pay back the debt by one set monthly payment, which is divided between your creditors.
Most DMPs are managed by a DMP provider who deals with your creditors for you. This means you don't need to deal with your creditors yourself.
A DMP is not legally binding, meaning you're not tied in for a minimum period and can cancel it at any time.
Is a DMP right for you?
A DMP may be a good option if the following apply to you:
you can afford your living costs and have a way to deal with any priority debts, but you're struggling to keep up with your credit cards and loans
you’d like someone to deal with your creditors for you
making one set monthly payment will help you to budget.
However, you need to be sure you understand the impact a DMP will have:
it may take longer to pay back your debt because you'll be paying less each month
your creditors won’t necessarily freeze the interest and charges on your debts, so the amount you owe might go down by less than you think
your DMP provider might charge you a fee, although there are several free providers you can use so there’s no need to pay if you don’t want to
your creditors might refuse to co-operate or continue to contact you
the DMP may show on your credit record, making it harder for you to get credit in the future.
If you’re unsure about whether this sounds like it’s right for you, you might want to think about other options for dealing with your debts.
Joint debts and DMPs
If you have a debt in joint names with someone else, this can be included in your DMP. However, your creditors may still chase the other person for all of the debt. This is because whenever you take out a credit agreement, such as a loan or bank account, with another person, you're both liable for the full amount of the debt. This is known as joint and several liability.
If both you and your partner are struggling with debts, you might want to consider setting up a joint DMP where you'd both be equally responsible for the repayment plan. It doesn't matter if you have different levels of income or debts. You can also include debts that are only in one name in a joint DMP.
How to get a DMP
If you’ve decided a DMP is right for you, you’ll need to follow these steps to set one up:
make sure you've sorted out your priority debts first
work out your budget to see if you have enough available income to make your monthly payment
choose a DMP provider, remembering that you can choose a free provider
check the agreement or contract carefully.
Next steps
FAQs
What Are the Disadvantages of a Debt Management Plan?
- Certain Debts Are Ineligible. DMPs generally don't include secured loans, like mortgages and auto loans, and some types of unsecured loans, such as student loans. ...
- You'll Pay Fees to the Credit Counseling Agency. ...
- Limited Access to Credit.
Best debt management companies. As you research companies that offer debt management plans, ask about the monthly fee, the setup fee, how long it may take to complete the plan and which types of debt you can include.
Which step is essential before you consider a debt management plan? ›
Connect with a credit counselor
The counselor will help you determine if a debt management plan is right for you, and that process begins with a financial review. Together with your counselor, you'll review your debt, income, and any other numbers or concerns that are relevant to your financial life.
Is it worth doing a debt management plan? ›
A DMP may be a good option if the following apply to you: you can afford your living costs and have a way to deal with any priority debts, but you're struggling to keep up with your credit cards and loans. you'd like someone to deal with your creditors for you. making one set monthly payment will help you to budget.
Which debts can t you pay off with a debt management plan? ›
DMPs don't include priority debts. These are debts that have been secured against your home and other assets, as well as utility bills or Council Tax. You'll need to prioritise payments to these in your budget. These must be paid in accordance with the original agreement.
Can you keep a credit card on a debt management plan? ›
You're required to close your accounts
Any credit card that is included in your DMP is required to be closed. Here's how it works — the creditor, which is typically a bank or other financial institution, works with MMI to create a DMP, which usually includes reduced interest rates on your credit card accounts.
What debts Cannot be included in a DMP? ›
Debts that cannot be included in a debt management plan (DMP) are those that are considered 'priority debts' such as mortgages and secured loans, student loans, court fines, and child support payments.
Does a DMP hurt your credit? ›
The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does affect your credit history, it does not have a lasting negative effect on your credit score.
What is the average interest rate on a debt management plan? ›
Every participating creditor offers their own rates, but in aggregate, the average interest rate for accounts included on a debt management plan with MMI is below 8%.
What are the 5 golden rules for managing debt? ›
1. Spend less than you make
- Pay yourself first (i.e. as soon as you get paid, transfer a little bit of money - it could be $20 - to your savings account before spending anything)
- Create a budget.
- Increase your income.
- Cancel unused subscriptions.
- Consider refinancing high interest loans.
Debt management plans (DMP) are flexible. This means you may be able to pay off a DMP early. You can do this by increasing monthly payments or paying a lump sum.
How much does a DMP cost? ›
The fees charged by for-profit DMP providers vary. They are typically around 17% of your monthly payment. Before you start a DMP with a company that charges you, make sure you: Find out what you are paying for.
What is a disadvantage of a debt management plan? ›
The cons of Debt Management Plans
Creditors require the accounts to be closed in order to be put on a DMP. This can slightly lower your credit score, because closing multiple accounts at the same time affects the length of your credit history.
Can I keep my bank account on a DMP? ›
Your Bank Account & A Debt Management Plan
In conclusion, a Debt Management Plan (DMP) does not directly affect your bank account. You can usually continue using your current bank account as usual when you enter a DMP providing that you do not wish to include a debt on your DMP that is with your bank account provider.
Can a DMP be refused? ›
Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.
What is the downside of using a debt relief program? ›
Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees. If over $600 is settled, the IRS will view this debt as a taxable income.
Does a debt management plan hurt your credit? ›
The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does affect your credit history, it does not have a lasting negative effect on your credit score.
Why is a DMP bad? ›
Reduced payments show you're having difficulty repaying what you owe, so lenders may see you as high-risk. So, if you apply to borrow money while you're on a DMP, lenders may reject your application or charge you higher interest rates.
What are two of the signs of trouble in debt management? ›
What Are the Warning Signs of a Debt Problem
- Sign #1: Mounting Credit Card Balances. ...
- Sign #2: Difficulty Making Minimum Payments. ...
- Sign #3: Persistent Overdrafts or Bounced Checks. ...
- Sign #4: Ignoring Bills or Avoiding Calls from Creditors. ...
- Sign #5: Using Savings to Cover Expenses. ...
- Sign #6: Stress & Anxiety About Finances.
