Are Debt Arrangement Schemes a Viable Alternative to DMPs?

25th May 2011

Every year thousands of Scots embark upon a debt management plan. Such schemes aim to enable individuals to reschedule their debt repayments to a monthly amount they can afford. In an environment where household finances are so tight for many people, the need and attraction of a debt management plan is obvious.

Debt management plans do however have some significant limitations. Foremost amongst these is the fact that creditors do not have to accept the new proposed repayment terms. Where repayment terms are rejected, the creditors retain the right to initiate legal recovery action against the debtor. In all instances creditors do not have to cease charging interest on the debts involved (though many do choose to). Where interest isn’t frozen debts may actually continue to increase in spite of the debt management plan.

These fundamental weaknesses can be overcome by using Debt Arrangement Schemes as opposed to DMPs. Once successfully established a DAS provides a significant level of both support and protection to a debtor seeking to repay the amount they owe.

Debt arrangement schemes are subject to creditor acceptance. However, the administrator of the debt arrangement scheme, the DAS Approved Money Adviser, can choose to reject unreasonable creditor objections. The debtor can benefit from an initial period of legal protection from creditors while debt arrangement schemes are being set up. Once set up, debt arrangement schemes ensure the creditors involved cannot take legal action against the debtor so long as the debt arrangement scheme conditions are met. Interest and charges have to stop once the scheme is up and running.

Debt management plans and debt arrangement schemes both involve the full repayment of any debt included. This can lead to a very lengthy repayment term if only a small proportion of the debt can be paid each month. When faced with a very long potential repayment term, it might be more appropriate to review time-limited options which include an element of the debt being written-off. In Scotland that primarily means a Scottish trust deed.

Scottish trust deeds provide many of the same benefits as debt arrangement schemes (in contrast to debt management plans). Once accepted, Scottish trust deeds are imposed upon creditors which were unwilling to accept previously, preventing further legal action and ensuring no more interest or other charges accrue. In addition, the payments are established over an agreed duration, often three years. Once the agreed payments are completed over the agreed term any remaining debt is legally written off.

As such, Scottish trust deeds might be suitable for debtors with more significant levels of debt and for whom a very long repayment period would be required to fully repay the amount. However, Scottish trust deeds are unlikely to be suitable for homeowners with significant equity built up in their property. In such scenarios debt arrangement schemes may be more suitable.

Debt management plans in Scotland can provide some relief to debtors, although it is extremely clear that the benefits of debt arrangement schemes and Scottish trust deeds greatly outweigh those of an informal debt management plan in most instances.

Accordingly, anyone in Scotland currently on a debt management plan may wish to review their circumstances with a professionally qualified debt adviser who is familiar with both debt arrangement schemes and Scottish trust deeds.

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