Debt Management Plans Explained

  • Debt management plans (DMPs) are agreements between someone in debt and the companies he or she owes money to – also known as creditors.
  • They help people struggling with their debts to get back on track by agreeing to make one affordable monthly payment that goes towards all their debts.
  • The size of this payment will be calculated by a debt adviser, and reflects the amount the borrower can afford to pay after covering essentials such as mortgage payments and day-to-day living costs.

How does a debt management plan differ from an IVA?

  • Individual Voluntary Arrangements (IVAs) are legally binding contracts that are usually only recommended for people with unsecured debts of at least £12,000.
  • DMPs are informal arrangements involving no solicitors or insolvency practitioners – meaning that the creditors taking part can potentially change their minds and demand full payment.

Other differences include that while an IVA involves waiving a percentage of the debt (because it cannot be paid off within a reasonable timeframe), people who sign up to a DMP are agreeing to pay back the full amount.

IVAs also generally last for five years, while DMPs can last for as long as it takes to clear the sum owed.

IVAs

+ You do not have to pay back the full amount

+ Threats stop, interest and charges are frozen

- Your credit score may suffer

DMPs

+ Calls and letters from creditors will stop

+ The impact on your credit score is less

- You must pay back the full amount, on which interest may continue to accumulate

Some facts about debt and debt management

  • British adults owe more than £1.4 trillion on credit cards, overdrafts, loans and mortgages.
  • Unsecured debt (which does not include mortgages) totals about £158 billion.
  • At least 15 million Britons are relying on credit to survive or are struggling with their debt repayments.
  • The average individual with debt problems owes around £16,000 in unsecured debt alone.
  • Use of high-cost credit – such as payday loans – has shot up in the last five years.
  • Some four in ten people in serious debt spend at least a year worrying about their situation before seeking help.
  • Of those with debt problems, 88% say their money worries keep them awake at night.

Can I get a free debt management plan?

  • Yes. There is no reason to pay for a DMP.

The quickest way to debt freedom is for 100% of the money you pay each month to go towards clearing the amount you owe. This is not the case with many debt management companies, which charge fees that can slash your monthly payments by about 15%. However, with a free debt management plan, 100% of the money you pay out goes towards paying off your debts.

That’s why TalkAboutDebt only recommends debt advisers offering free DMPs, such as The Debt Advice Foundation and Payplan.

Still confused? Why not contact one of our ‘Leading Debt Advisors’, to find out whether a DMP is right for you. You will find them on our homepage.