Debt Management Plans
Debt management plans help people who are struggling with debts to repay their creditors at a rate which they can afford. Sometimes abbreviated to a “DMP”, debt management is a valid alternative to a protected trust deed and the other formal debt solutions which exist under Scottish legislation.
Your monthly DMP payment is calculated by creating an “income and expenditure” budget. Priority is placed upon essential bills like your mortgage/rent, council tax, and utility bills. Also prioritised is essential expenditure in areas such as transport and general housekeeping expenditure. Allowances are made for a broad range of other expenditure (for example car servicing, haircuts, reasonable leisure activities and home repairs).
This overall expenditure budget is subtracted from your total income total to establish how money is truly left over. This amount is commonly known as your “disposable income” and is the amount that you’d normally offer to pay each month via your debt management plan.
The debt management company then writes to your creditors offering to repay the debts at this affordable rate. The amounts offered on your behalf are justified by providing the details of your income and expenditure to your creditors.
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 on one credit card, that card provider will usually 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 firm that you have employed to deal with this.
A debt management plan can help almost anyone who wants to repay their debts, who cannot afford their full contractual repayments, but who can afford to pay a reasonable amount towards their debts each month.
Some reasons people in Scotland choose to use a DMP include:
Repaying debt without entering a formal insolvency. Formal personal insolvency can threaten assets (such as a home), can be inflexible, and can cause significant issues for those working in certain professions. Debt management may be more flexible and less onerous.
Dealing 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 their children grow up and leave the family home. Debt management plans can be used to manage short-term situations until debt affordability is restored.
To protect a home. In bankruptcy it would be expected that any equity held in a home be paid towards the debts. This might even require the sale of that home. In a protected trust deed any equity held in the home will also be considered and might have to be realised somehow.
To protect professional status. Formal insolvency (bankruptcy or protected trust deeds) can be challenging or impossible for certain professionals. We are aware that some professionals are also concerned that entering a formal DAS (debt arrangement scheme) might also cause professional issues. A DMP is an “informal” agreement with creditors and therefore does not generally present the same issues.
Conforming to specific 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 trust deeds). Where it is impossible to continue making repayments at the full contractual rates, debt management might eventually facilitate the repayment of the full amount in an affordable way.
Flexibility is required. This particularly applies to the self-employed, who can be subject to significant increases and decreases in income. Debt management plans may be more readily flexible than some formal alternatives.
Secrecy is required. 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 their co-owner being aware for example. We always encourage openness within families in this scenario, but where people feel that this simply isn’t possible debt management may be helpful.
A Better Debt Management Alternative In Scotland?
Don’t go ahead with a debt management plan until you’ve fully reviewed details about the Debt Arrangement Scheme.
Informal debt management plans offer no certainty regarding creditor acceptance today, or regarding continued creditor acceptance in the future. A DMP also does not guarantee that interest or charges on your accounts will stop (or stay stopped). You have no formal protection against creditor legal recovery action.
The Debt Arrangement Scheme is a debt management tool which is only available to residents of Scotland. It solves some of the problems associated with a DMP.
Provided that your creditors accept DAS at the start, they’ll be bound by it so long as you stick to your side of the deal. The creditors cannot charge you interest, though this might be re-added later if you don’t meet your obligations. Creditors covered by a DAS cannot take legal action against you to recover the debts.
As a result of these benefits, the Debt Arrangement Scheme will be a better debt management process for most Scottish residents.
Other Information About Debt Management Plans
Any “initial fee” paid to a debt management plan provider (and ceasing to pay your creditors directly) will result in your accounts going into arrears or further arrears. A DMP may result in an increase in the overall amount repayable and the time that it takes you to repay it.
Your ability to get further credit will be affected by a debt management plan; please see our “credit rating” page for further details.
Trust-Deed.co.uk is connected to Bright Oak Ltd; a commercial provider of debt management plans. You can talk to them on either 0800 0437222 or 02920 492661. There are also free-to-client debt management providers available. Visit our other sources of help page for further details.