What is a debt management plan (DMP) and when might it be a good option for those in debt? Andy Shaw, Debt Advice Coordinator at StepChange Debt Charity, explains all you need to know.

What is a debt management plan?

A debt management plan (DMP) is one of a range of debt solutions that can be provided to people in problem debt. A DMP allows you to manage your debts and pay them off at a more affordable rate. This is done by making reduced monthly payments based on whatever disposable income you have after your monthly budget.

You can only use a DMP for unsecured debts, including:

• overdrafts
• personal loans
• credit card, store card debts or payday loans
• bank or building society loans
• money borrowed from friends or family

A DMP may be suitable for you if you can still afford to make payments towards your debts after creating a budget to cover essentials such as food, utilities and transport. During your DMP you’ll need to stick to your agreed budget, so it’s important that any budget you do as part of the process is achievable.

How do you get a debt management plan?

You can set up a DMP by yourself, but many people find it easier to go through a professional debt adviser. DMPs can be done for free, although some providers may charge for the administration of the plan. Using a fee-free DMP provider can often be a more attractive option as any money saved on fees can then be put towards paying off debts more quickly.

Before you decide on a DMP provider, there are some of the things you should consider, such as:

• Is the DMP provider authorised by the FCA? You can check this by entering their name or postcode on the Financial Services Register.
• Does the DMP provider look at all the possible debt solutions?
• What fees, if any, are involved and are they paid upfront or as part of your monthly payments? Is there a free alternative?
• What happens if your circumstances change and you need to cancel or change your plan? Is there a fee associated with it?

What are the disadvantages of a debt management plan?

DMPs are not for everyone, however. If it would take a long period of time to repay debts, or even after budgeting your outgoings are still higher than your income, it is important to see if other solutions, such as insolvency or bankruptcy, would serve you better. Your advice provider should be able to help you with this or refer you to someone who can. If the alternate approach involves an insolvency solution, you will be referred to a licensed insolvency practitioner.

It is also important to note that DMPs do not write off your debts, and each debt will need to be repaid as part of your DMP.

Not all debts can be included in a DMP. Although unsecured debts such as personal loans, store card debts and overdrafts can be put into a DMP, some priority debts, like those where court action has already been taken, won’t usually be included in a DMP, and you will likely need to keep paying these at the agreed amount. Your DMP provider may be able to help you agree repayments with these creditors, even if they can’t pay them through your plan.

Because you’ll be repaying your creditors less than your contractual payments each month, your credit rating will be affected. Your creditors may continue to add interest and charges to the amount you owe, although your DMP provider will ask them to stop these. They may also take further action to recover your debt, including court action. However, this is less likely if you are making regular repayments.

About the author

Andy Shaw is a Debt Advice Coordinator at StepChange Debt Charity, a provider of free debt advice either online or over the phone.

See also

What restrictions are there during bankruptcy?

The truth about bankruptcy: five common myths dispelled

Find out more

Options for paying off your debts (Gov.uk)

Debt Management Plans (Gov.uk)

Financial Services Register (FCA)

Image: Getty Images

Publication date: 6 January 2020