There a number of advantages and disadvantages to a Debt Management Plan (DMP). Their relevance will very much depend on your individual circumstances. We consider the advantages first.
1. Quick to implement
A DMP allows you to start making reduced payments to your debts immediately. The payments you make next month could be your first DMP payments putting you straight back in control of your money. Collection letters and phone calls from your creditors will take 2-3 months to reduce.
2. Private solution
Because it is an informal solution, anyone can start a DMP. There is no formal register of DMPs and no-one other than your creditors will know about the agreement. For this reason starting a DMP is very unlikely to affect your job.
Once you have started a DMP, you can increase your payments at any time if your situation improves or even pay off your debt in full if you get a windfall. In addition it is possible to leave creditors out of the plan or even pay off one before another.
4. No need to release home equity
If you are a home owner you can use a DMP without having to release any equity you have to put towards your debt.
It is important to understand that as well as benefits, starting a Debt Management Plan can also have some disadvantages. Before making a decision to start a DMP you need to understand these in the context of your circumstances.
1. Extended repayment period
If you start a DMP, you are still obliged to repay 100% of your outstanding debt but simply based on smaller payments each month. This will significantly extend the time that it takes to repay your debt unless you can increase your payments or settle your debts with a lump sum sometime in the future.
2. Your living expenses will be restricted
During your DMP you will be required to live within a restricted living expenses budget. You should pay all of your surplus income into the Plan.
3. Only Unsecured debts are included
Only unsecured debts which are highlighted in your DMP will be included. Any unsecured debts which you leave out either by choice or mistake will remain outstanding and you will need to continue to pay these. Secured debts such as your Mortgage are not included. You must maintain the monthly payments towards your secured debts even after you start a DMP or you will risk the property or other asset that the debt is secured against being repossessed.
4. Interest and charges not frozen
Once you are in a DMP, your creditors can continue to add ongoing interest and late payment charges adding considerably more the that amount that you have to repay and the time your DMP lasts. If you maintain your DMP payments regularly, your creditors should be persuaded to suspend these charges. However they are not legally obliged to do so.
5. No legal protection from creditors
A DMP is not a legally binding solution. This means that even if you maintain your agreed payments, your creditors may still decide to take legal action against you to try and enforce their debt. This could include applying for a county court judgement and a charging order securing the debt against your property if you are a home owner.
6. Negative effect on credit rating
If you start a debt management plan you will reduce the payments you make towards your debts. This will mean that your account falls into arrears or further into arrears and your credit rating will become significantly worse. For more information see How DMPs affect your credit rating.
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