British households are sinking under vast piles of debt. In January 2019, research showed that each owed an average of £2,688 on credit, accounting for a hefty £72.5bn on credit cards alone. Unsurprisingly the rising number of those with debt problems has resulted in more and more people seeking debt advice. Among the solutions they seek is something known as a Debt Management Plan. Here’s everything you need to know about this type of debt solution, and why there may be a better option out there for your debt problem.
Debt Management Plan – A brief overview
A Debt Management Plan is suitable for those struggling with a debt problem that has the following warning signs:
- Your credit cards are maxed out
- Lenders are refusing your credit applications
- You feel as though your finances are out of control
- You’re unable to afford basic necessities
A DMP is an informal solution that sets up a monthly payment schedule that suits your level of income and expenditure. There’s no set length of a Debt Management Plan, which is instead based upon how much you owe and how much you can afford to repay. For example, if you owe £10,000 and can only afford a repayment of £125 a month, the DMP would last for 80 months (just over six years). To gain an idea as to how long your debts may take to repay under a DMP, read this guide from Citizens Advice.
Debt Management Plans are arranged through a dedicated third-party that specialises in DMPs. Known as a debt management agency, this third-party will act as an impartial body that communicates between you and your creditors.
This type of debt management help can only be used for non-priority debts, which includes…
- Personal loans
- Bank or building society loans
- Money borrowed from friends or family
- Credit card, store card debts or payday loans
- Catalogue, home credit or in-store credit debts
Like Individual Voluntary Arrangements, Debt Management Plans can’t cover the following forms of debt:
- Court/legal fees fines
- TV Licence
- Council Tax
- Gas/electricity/utility bills
- Child support and maintenance
- Income Tax, National Insurance and VAT
- Mortgage, rent and any loans secured against your home
- Hire purchase agreements
For those struggling under the pressure of debt problems, there’s also a very serious disadvantage of a Debt Management Plan, and that’s the fact that creditors can ignore your offer and/or they may continue to contact you. As such, whatever the form of debt management you choose, you should always seek debt advice from a charity or government-backed organisation, such as:
- StepChange Debt Charity
- National Debtline
- Citizens Advice – England and Wales
- Citizens Advice – Scotland
- Citizens Advice – Northern Ireland
- Advice NI
Individual Voluntary Arrangements versus Debt Management Plans
Individual Voluntary Arrangements share a lot of similarities with Debt Management Plans, such as the benefits of a third-party communicating with your creditors and being able to pay a single monthly payment.
However there are some very important differences between the two that may make an IVA a wholly more suitable debt management solution for you, including:
- In contrast to a DMP – which is an informal agreement between you and your creditors, an IVA is legally-binding. As such, once your IVA is set up, your creditors aren’t allowed to contact you. Should they do so, they’d be breaking the law.
- Unlike a DMP, the timescale of an IVA is fixed – lasting for either 60 or 72 months.
- After the 60 to 72-month term, if you’re still unable to afford to pay your debts, any remaining debt would be written off. In practice, this means that you may never have to repay anything up to 80% of your debt.
IVAs, like many forms of insolvency, have several qualification criteria. To be eligible, you must:
- Owe a minimum of £5,000 to two or more creditors, although some providers require that you owe £15,000
- Be technically insolvent, which means that you are unable to pay your debts as their repayment dates roll around
- Have liabilities that outweigh your assets
There’s no question about it – debt management takes a few brave steps forward and plenty of paperwork. However with the strategy above you can break free from your debt problem – even if you’ve been trapped in the cycle for year after year.
For free, expert debt advice, we’re right here when you need us. Our team have years of experience in dealing with even the most serious debt problems. There’s not much that we haven’t seen or heard.
Call us on 0800 002 9051, or send a message via our contact page and we can call you back.