At the end of 2016, it was estimated that the average UK household debt was £10,000 (excluding mortgage debt). This may be a manageable amount of debt for some, but for others this amount of debt can quickly spiral and lead to huge problems.
Debts can have a massive impact on all aspects of our lives. The stress can impact on our relationships, our children, our emotional wellbeing and our future prospects. It’s important to take control of debt early in order to beat it.
What is a Debt Management Plan?
A Debt Management Plan (or DMP as it’s widely known), is pretty much what it says. It’s a formal plan or arrangement made between the debtor (you) and the creditors (the people you owe money to). At the end of the plan, all of the debts have been paid off.
What are the benefits?
In many cases, creditors will agree to freeze the interest on debts once they enter into a formal DMP. Interest can be astronomical and freezing the interest means that every single penny you pay goes towards clearing your debt.
Payment amounts are set at an affordable level. All of your priority bills such as rent/mortgage, council tax, utilities, as well as your food bills and all of your other expenses are taken into consideration before establishing how much you can afford to pay towards your debt.
Once you enter into a DMP, your creditors will more than likely stop harrassing you for payments. During the initial crossover period, you may still get the odd call or letter, but this will quickly stop once your record is updated.
At the end of the plan you’ll be debt free!
Entering into a DMP has a big impact on your credit rating. You will likely have markers on your credit history though anyway if you have been struggling to make your minimum payments for a while. Once the creditor enters a default on your account, that marker will then impact your score for 6 years. This means the likelihood of you getting any other credit during that time is very slim. In one way this is a good thing, it means you can’t be tempted into taking out a loan, anything you want or need, you have to save and budget for.
Before you enter into a DMP.
It’s a good idea to make sure you have an emergency fund set up BEFORE starting your DMP. A good figure to aim for is £1,000. Don’t be afraid to make token payments whilst you save up for this. You can pay every creditor £1/month if it means you get yourself in a good positition before the DMP starts.
If you decide to use a third party to set up your DMP, make sure it’s a free one. There are a number of companies out there who charge a fee. There’s no need to pay anybody to do this for you. And paying a fee every month means less money goes towards your debts. Use one of the free charities such as StepChange. You can use their budget calculator without committing to anything and this will give you a good idea of your options!
I’d love to hear your experiences with Debt Management Plans.