If you’re struggling with unmanageable debts, then you might be considering a Debt Management Plan (DMP). But before you take that leap, it’s important that you understand Debt Management Plan pros and cons. A DMP can be a really good way to get your debts cleared, but it doesn’t come without it’s issues, so it’s really vital that you enter into it with your eyes wide open knowing all the facts.
What is a Debt Management Plan?
If you’re struggling with debt, then you might be wondering where to turn and what route to take to get your debts paid off.
A Debt Management Plan is just one of many options when you find that you can’t cover the costs of paying back your debts.
A Debt Management plan is an agreement between you and your creditors to clear your debts with lower monthly payments. This is usually because you can’t afford to pay the debts back at the original rate.
Debt Management Plan Pros and Cons
If you’re struggling to meet your monthly minimum repayments, then a Debt Management Plan can seem like the answer to your dreams. You still pay off your debts, but at a lower, more affordable rate. Great, right? But there are some significant things that you need to bear in mind if you’re planning on heading down this track.
Read through these Debt Management Plan pros and cons carefully, it’s important you spend some time considering just how a DMP will impact you in the long term, as well as how it will help you in your immediate future.
Debt Management Plan Pros
- Pay back only what you can afford.
- If you use one of the free providers, you will only need to make one monthly payment rather than the multiple you may currently be juggling.
- Usually, once you’ve agreed your DMP you won’t hear from your creditors – no more fear of answering the phone or opening the post.
- Interest charges are usually frozen, meaning that every penny you pay back actually goes towards clearing your debt.
- A DMP is a much less damaging option than an IVA or bankruptcy.
Debt Management Plan Cons
- A DMP is not a legally binding contract, so your creditors could withdraw their agreement at any time (this is unusual though if you are meeting your payments each month).
- Creditors could reject your DMP outright. Again, this is unlikely if you can show that you’re doing your best to get it paid off.
- Debt Management Plans tend to take longer than other debt solutions, but they do have a less long-lasting impact on your future.
- With a DMP you will usually default on your payments as you’ll be paying less per month than your original agreement. This means you will have defaults on your credit record which will stay there for six years.
- It will be more difficult to apply for other financial products such as a mortgage, loan or credit card.
How to get started with a DMP
When you search online, there are LOTS of companies that pop up offering to help you to get your DMP up and running. But, you need to be really careful with this. You should never pay a company to enter into a Debt Management Plan. Use a free debt advice service such as StepChange or PayPlan. You want EVERY PENNY you pay to go towards clearing your debts.
You need to make sure that a DMP is definitely the right option for you and your circumstances. If you’ve weighed up all of the Debt Management Plan pros and cons and you think it might be the best way for you to clear your debt, then I really recommend heading over to StepChange and using their debt remedy tool.
One of the best things about the debt remedy tool is that you can do it all online. So, if you’re worried about speaking to somebody, then you can just do this in your own time in the privacy of your own home. Nobody will contact you about it, and you are solely responsible for the steps you take.
The debt remedy tool will ask lots of questions about your debts, incomings and outgoings. Make sure you have all of your financial information to hand. It’s a good idea to go through your bank statements so that you know exactly where your money is going each month. You will need to work out how much money you need for food, clothes, medication, dentist, pets, hobbies, school trips etc. It goes into lots of detail but that’s only so that they can be sure you don’t commit to paying back more than you can afford each month.
Once you’ve completed the debt remedy, you’ll be able to see what course of action is recommended for you.
What happens next?
If, after using the debt remedy tool and weighing up the Debt Management Plan pros and cons, you decide that a DMP is the best way for you to clear your debts, then StepChange/PayPlan will talk you through the next steps. They will contact your creditors for you with their proposed repayment plan. They will ask that creditors contact them directly so that you don’t have to deal with it.
Most creditors will accept a DMP proposal, provided that they can see that you’re making an effort to repay the debt. In the majority of cases, the creditors will freeze the interest charges immediately which means that every penny you pay goes towards clearing the debt, rather than just paying off the interest accrued.
StepChange/PayPlan will set up a direct debit with you with the same amount going out in one payment each month. They will then distribute that amount fairly between your creditors.
A DMP can be a great way to clear your debts when they become unmanageable. But, make sure that you are fully aware of all of the implications and the Debt Management Plan pros and cons before you get started.