Debt Management Plans

Debt management plans (or DMP’s) are a method for someone who cannot afford their current debt repayments to repay their creditors at an affordable rate. As such it is a valid alternative to Protected Trust Deeds in certain circumstances.

Affordability is calculated by creating an “income and expenditure” budget. Priority is placed upon essentials such as mortgage/rent, council tax, utility bills, transport and general housekeeping expenditure. Allowances are also made for many other areas of expenditure (for example car servicing, haircuts, reasonable leisure activities and home repairs) that can easily be forgotten. It’s very important all expenditure areas are covered to make sure that the repayments that may be offered to creditors are sustainable. In this respect the process is almost identical to that used with Protected Trust Deeds.

The overall expenditure total is subtracted from the income total to find out how much is left. This amount is commonly known as “disposable income” and is the amount that is normally offered in total to repay creditors via the debt management plan (DMP).

The debt management company will then write to your creditors offering to repay the debts at this affordable rate. The amount offered is justified by providing the details of income and expenditure.

Each creditor is usually offered their fair share of the money available. The fair share is based on percentages and is known as a “pro rata” payment. If you owe 50% of your total debts to one credit card company this company will be offered 50% of your available payment.

You will then make this payment each month to the debt management company and they will distribute the payments to your creditors.

You can also direct any creditor contact received (e.g. letters) to the debt management company that you have employed for them to deal with.

A debt management plan (or DMP) can help anyone who wants to repay their debts, cannot afford the contractual repayments, but can afford to pay an amount towards the debts each month.

There are a huge range of different but sensible reasons why people choose a debt management plans to deal with their debt concerns. Some common scenarios include:

• An attempt to repay debt without recourse to formal insolvency (such as bankruptcy or Protected Trust Deeds). Formal insolvency can threaten assets (such as a home), can be inflexible and can cause significant issues for those in certain professions. DMP’s can offer a more flexible and informal solution.
  
  
• A measure to deal with short or medium term repayment problems. Some people are waiting for a work promotion, waiting for their home to sell, waiting for work overtime or bonuses to return, or waiting for expenditure to significantly reduce when children leave the home. Debt management plans can be used to manage such situations until such time that debt affordability is restored.
  
  
• A measure to protect a home. In bankruptcy it would be expected that any equity held in a home be paid towards the debts. This often requires the sale of the home. In a Protected Trust Deed any equity held in the home will be considered towards the end of the Trust Deed. This can result in a major remortgage having to take place. This can mean that much unsecured debt is carried well beyond the end of the Protected Trust Deed but now it’s secured on your home.
  
  
• A measure to protect professional status. Formal insolvency (bankruptcy or Protected Trust Deeds) can be challenging or impossible for certain professionals. A DMP is an “informal” agreement with creditors and therefore does not present the same issues.
  
  
• The means to conform with moral, ethical or religious considerations. Many people want to repay the money that they have borrowed (which is unlikely to be fully the case in bankruptcy or Protected Trust Deeds). Where it is impossible to continue making payments at the contractual rates a debt management plan can facilitate the repayment of the full amount at a rate that is affordable.
  
  
• Where flexibility is required. DMP’s are often preferred to Protected Trust Deeds where people are uncertain about what the future holds for them financially. This particularly applies to the self-employed who can be subject to significant increases and decreases in income. Debt management plans are flexible in that they can readily be altered to accomodate changing circumstances.
  
  
• For reasons of secrecy. For personal reasons many people are unwilling to share their debt concerns with immediate family. Joint homeowners are highly unlikely to be able to proceed with bankruptcy or Protected Trust Deeds without the co-owner being aware for example. We encourage openness in this scenario but where people feel that is not possible a Debt Management Plan may be helpful.
  

Please note that the operators of Trust-Deed.co.uk suggest that no decision is taken to proceed with a debt management plan without first reviewing the Debt Arrangement Scheme as an alternative.

We also advise residents of Scotland who are currently in a debt management plan to consider switching from their DMP to the Debt Arrangement Scheme.

A debt management plan does not offer certainty of creditor acceptance or continued creditor acceptance. A debt management plan also does not guarantee that interest or charges will cease. The creditors of an individual who is in a debt management plan are free to commence or continue with legal debt recovery measures.

Any “initial fee” paid to a debt management plan provider will result in accounts going into further arrears. A DMP may result in an increase in the overall amount repayable. Your ability to get further credit will be affected by a debt management plan; please see our “credit rating” page for further details.

By contrast the Debt Arrangement Scheme offers some significant advantages. Once accepted, no further interest will be added unless the scheme is not completed. The creditors cannot proceed with legal action against the debtor. The DAS Approved Money Adviser that administrates the scheme can overrule unreasonable creditor objections to the scheme being accepted.

Trust-Deed.co.uk is connected to Bright Oak Ltd who are a provider of debt management plans. If you would like to investigate whether a debt management plan is right for you please contact them using the contact form below or on 0800 0437222.

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