Debt Management Plans: Explained
If you're in debt and are looking for ways to alleviate your situation, it's worth taking stock of the debt management options available to you.
There are many different options for managing your debts available, so it can be complicated trying to work out which option is best for you and your situation. You might want to consider a debt management plan.
At NDH Financial, we're one of the top rated personal insolvency specialists, based on our Trustpilot reviews. We're a personal insolvency specialist, with our own in-house licenced Insolvency Practitioner, specialising in one particular form of debt solution known as an IVA. An IVA is similar to a debt management plan but there are a few differences, which you can find more about further down this page.
If you'd like to find out a little more about what we do, get in touch and one of our experienced debt consultants will be able to run you through the process.
Debt Management Plans: A Definition
Before deciding to go ahead with a debt management plan (DMP), first you need to know what one is.
Put simply - a debt management plan is an informal agreement between you and your creditors to help you to clear your outstanding debts.
A DMP is a form of debt consolidation that is particularly useful if you're struggling to pay the debt you currently have. It will usually involve you paying a more affordable rate over the period that the plan is in place.
One monthly payment is paid to your DMP provider, which is then split between your lenders. This means that you don't have to pay multiple payments each month, making the process a lot easier. You also won't need to deal with your creditors directly, taking some of the worry out of your hands.
The length of the plan agreement will depend on how much debt you have but it can last up to ten years. Your provider will discuss this with you before you formalise your application.
DMPs aren't legally binding, meaning you can cancel them at any point - it's essential to check the terms and conditions before doing so though as cancellation fees could be added. However, if you aren't able to pay for several months, your creditors can cancel the agreement due to its informal nature.
What Types of Debt Can You Include within Your Debt Management Plan?
Before going ahead with a debt management plan, it's important to work out whether the debts you have can be included in the scheme.
Examples of debts that can be included in a DMP are:
Catalogue and store card debt
Unsecured bank loans
Payday loans and personal loans
Other non-priority debts
Priority debts - like mortgage repayments, council tax, electricity bills and car finance - cannot be included within a DMP.
Whereas priority debts can lead to serious consequences if not paid off promptly, non-priority debts are usually less important - however, failing to pay will impact your credit score, so they do still need to be paid off eventually. Legal action can also be taken against you in some circumstances, even if your debts are classed under the non-priority banner.
You also can't include secured debt in a debt management plan. Secured debt is based upon the lender receiving some form of collateral if the debt isn't paid within the agreed time. This will usually be either a car or a house.
If the payments aren't made in a timely manner, your lender could have the right to take the collateral from you. Unsecured debt, on the other hand, is debt that isn't secured against an asset, meaning your lender cannot seize goods from you to pay it off.
Who Qualifies For a DMP?
As DMPs are informal agreements, there isn't a list of set criteria that you need to abide by. However, there are some requirements you should take into account before applying.
The first step is ensuring that your debts qualify for a DMP - you need to ensure they're classed as unsecured and/or non-priority debts. Make sure you have enough money to keep up with the regular payments that will be required each month, as well as budgeting money for your other typical needs.
If you don't have a stable income coming into your bank account every month, your creditors might not agree to a debt management plan.
DMPs are only available to people living in England, Wales and Northern Ireland. If you live in Scotland, you will need to seek an alternative debt solution, such as a Debt Arrangement Scheme (DAS).
If you're unsure whether a DMP might be the best option for you, you might want to explore other options, such as an IVA. For more information about IVAs, fill in the form on our website and we'll get in touch as soon as possible.
Child maintenance arrears
The amount of unpaid debt you need to have accumulated differs depending on your IVA provider, but it's typically only considered when you owe more than £7,000 in unsecured debt.
Like debt management plans, you’ll pay one monthly payment, which will be distributed amongst your creditors. Only 75% of your creditors that vote on the proposals, have to agree to an IVA, and they're not allowed to hassle you or keep chasing you for the debt while the arrangement is in place.
As an IVA is a formal contract, there are steps that must be taken if you want to cancel it once the IVA is approved. As a result, it will not be cancelled immediately upon request. Also, if you do not keep up with the required payments, or comply with the other obligations, the IVA will be terminated.
Interest charges and other fees are frozen once the IVA is approved - these charges may be added to your existing debt if the IVA is terminated, which may mean there is no reduction in your debt if you do not complete the term.
If you still have unsecured debt remaining once you have completed the payment term, it will be written off. Your credit score will be affected by having an IVA, but this will start to recover after 6 years.
How Does an IVA Compare to a Debt Management Plan?
First, the similarities: both options allow you to consolidate your debt, ensuring that you only pay one affordable payment each month (instead of having to pay your creditors separately). Both also only cater to unsecured debts, and they share the rules regarding priority and non-priority debts.
However, this is where the similarities end. Unlike a debt management plan, an IVA means that you are entering a formal insolvency procedure, which essentially means that you're unable to pay off your debts when they're due. Because of this, IVAs are formal and legally binding, whereas DMPs are not.
You'll be added to the insolvency register if your IVA is accepted, which your creditors can check themselves. Your creditors are unable to contact you whilst you have an IVA in place. With a DMP, they're allowed to keep chasing you, and you are not placed on the insolvency register.
IVAs are usually set for a period of five to six years - any remaining unsecured debt is wiped at the end of this arrangement. When you have a DMP, the plan will run until the debt is fully paid off (up to ten years), unless you decide to cancel the plan. You can cancel a DMP at any time - although you may incur cancellation fees if you cancel before your debt has been cleared.
An IVA can’t be cancelled immediately, and can be terminated in some circumstances. The Insolvency Practitioner will need to liaise with your creditors, to confirm the termination of the IVA. Once the IVA is terminated, the termination will be added to your credit report.
When you take out an IVA, all fees and interest charges are frozen. However, if the IVA is terminated, these charges will be added on, dating from the start of the original arrangement. This could heavily increase the debt you have, making it less affordable to write off.
Did you know?
However, you'll need to seriously consider the consequences of switching beforehand. You'll no longer be protected by the legal aspects of the IVA, and you'll need to work out the extra fees and charges added onto your existing debt by your creditors and your DMP provider.
What Are the Pros and Cons of Using a Debt Management Plan?
There are many pros and cons to using a debt management plan. It's important to read through the information available to ensure you're fully informed before committing to a new debt solution.
If you're not sure about which option to go for, this section might help you to make up your mind.
Advantages of Using a DMP
- Consolidate and track your debts easily - DMPs batch all of your debts together, meaning you only have one payment to account for each month. This makes it much easier than having to keep track of multiple debts. (Note: IVAs also have this in common.)
- Intended to take you closer to being debt-free - Taking out a debt solution is a step forward, giving you a plan to get your finances under control.
- An added degree of flexibility - A major advantage of a DMP is that you can change the amount you pay each month. Your monthly payments can be increased or decreased, depending on what suits your present situation. You can also cancel a debt management plan fairly easily too.
- The admin is carried out by someone else - Whilst you still have to pay the payments, your provider will do the rest of the work, setting the plan up and sharing the payments out between your creditors (This is also the case with IVAs).
Risks Associated with Using a DMP
- Your credit score will be lowered - As your DMP will be listed on the insolvency register, your credit score will be impacted. (This is also the case with IVAs).
- The interest isn't frozen - Unlike an IVA, creditors are still free to add interest during the period of time it's active, so you'll still have to pay this, although some creditors will agree to freeze it. This means that the interest you pay on top of the debt will increase in line with the time it takes you to pay the debt back.
- Defaults may still be recorded - Even though you've agreed to pay your debts off using a DMP, a default may still be recorded on your credit file if you've opted for reduced payments. A default will stay on your record for six years and may prevent other creditors from lending you money during that time.
- All your creditors have to agree to a DMP - All your creditors have to agree to a debt management plan, whereas with an IVA only 75% have to agree to it.
- Extra fees - Unlike an IVA, fees and charges may not be frozen if your DMP is accepted. Your provider may also charge fees for administering the plan, although there are charities that exist that might be able to do it for free if needed. If additional fees are added, this will mean that it will take longer to clear the debt.
There's a lot to consider when deciding on whether a debt management plan is right for you - like any financial decision, it's not something that should be taken lightly.
If you'd like to find out a little more about what NDH Financial does, fill in your details on our contact page and we'll be in touch.
Achieving Financial Freedom: The NDH Way
At NDH Financial, we're here to help you get back on track with your finances. We're unable to offer debt management plans, but as a personal insolvency specialist, with our own licenced insolvency practitioner, we can set up an IVA for you.
IVAs can be a really useful solution for people suffering from unmanageable debt, allowing you to combine all your unsecured debts into one affordable package each month, whilst giving you a fresh start within a reasonable period of time. To find out more about how an IVA can help you, head to our dedicated IVA Learning Hub.
NDH Financial is one of the top rated IVA providers based on Trustpilot reviews - our Insolvency Practitioner has helped thousands of people on their way to becoming debt-free with over 15 years experience. Our combined experience within the world of personal insolvency has poised us perfectly to be able to help people across the UK with their debt - our 5-star Trustpilot score speaks for itself.
Financial freedom starts with taking control of your debt. Get in touch today to get started.
Contact NDH Financial for Further Information about Writing Off Debt
As this page shows, there are various scenarios in which you would be able to achieve a debt write-off. However, we emphasise that the information here should be seen only as guidance - the onus is on you to discern what debt solution would best meet your needs.
At NDH Financial, we specialise in IVAs - they can be an ideal option for people who are struggling financially with more than one unsecured debt, so they’re worth considering if you come under that umbrella, especially if your circumstances mean you do not want to apply for bankruptcy, or are unable to obtain a DRO. If you’d like to find out a little more about the IVA process, our IVA Learning Hub is the place to be!
If you remain unsure whether it is practically possible for you to write off your particular debt, feel free to call us on 0800 002 9051 for further information or to apply for an IVA.
Do You Have Any More Questions?
Our IVA Learning Hub Can Help
We know you might have questions and that’s fine.
We can answer most of those on our call.
But we’ve also built our learning hub so that you can learn more about an IVA and see if one is right for you.
Click below to check it out.