What is a debt management plan?
More and more of us are using consumer credit products. Be it credit cards, personal loans, car finance or even payday loans. But if it gets unmanageable, a debt solution or debt management plan (DMP) could be an option. A debt management plan is an agreement between a person and their creditors which enables them to pay off their debts in a more manageable way. It's commonly used when debt becomes unmanageable. For example, This could be if a job loss was imminent, for example, or if unexpected bills made it difficult to maintain payments on existing debt. But most commonly, they are used when debt has simply gotten to be too much, and payments are being missed, and debt is mounting. This could be a plethora of maxed-out credit cards, or a series of loans.
Why use a debt management company?
A debt management company can make it logistically simpler to deal with debt. For example, they can take a single payment and distribute it between several creditors, for example, multiple credit card, or loan companies. Alternatives to using a debt management plan can be IVA (individual voluntary arrangements), administration orders, or in extreme cases, bankruptcy.
How do debt management plans work?
A typical debt management plan will involve agreeing to paying off smaller amounts of the debt, over a longer period of time. This can be done directly between with the creditors (the company the debt is owed to), or via a debt management company. Smaller payments are more manageable, so the creditor is more confident that the debt will be paid.
How will a debt management plan affect you?
A debt management plan can help get creditors “off your back” as they will recognise a DMP as a positive course of action towards paying off the full debt total. They are however, at the creditor's’ discretion, who can decide (especially if repayments are not met) to terminate the plan at any time.
A positive side effect of using a DMP is that it can often improve credit scores, making credit more easily available in future. Credit scoring agencies use a proprietary method and score, so this may not always be the case for all of them, but paying off debt will generally have a net positive effect on your credit score.
Who qualifies for a debt management plan
One of the criteria for using a DMP is that the debt can only be unsecured debt. This means that mortgages, many forms of car finance, and other ‘secured’ loans cannot be resolved using a DMP. In the case of secured loans, any outstanding debt can be recovered from the secured asset - the house, or the car.
Who regulates debt management companies?
When looking for a debt management company, ensure that they are authorised by the Financial Conduct Authority (the ‘FCA’). You can search the register here to ensure that they are fully authorised. Many will also be signed up to the largest debt management association DEMSA which aims to promote good practice among debt management companies.
How much do debt solutions companies charge?
Some debt management companies are charities and will not charge a fee for their services. These include National Debtline, StepChange, and PayPlan, although they may get a payment from credit firms. Many, however, will charge a fee, which can vary. Debt management companies make money in two ways - either by charging a setup fee, for their services, or a fee for every time you make a payment. Paid-for debt solutions sometimes claim they offer a better service because they are charging for their plans, however this is not always the case, and doing some research before deciding on a company is always a good idea. We have consumer reviews of several DMPs including Abacus, ClearDebt, DissolveDebt, MoneyPlus, Harrington Brooks, and several others.
Which debt management company is best?
With dozens of debt management companies and plans available, and some which operate only in specific regions, a little research is imperative when choosing a company to help you escape debt. Ensure that the company you choose is authorised by the FCA, and be sure to check out our debt management company reviews on Smart Money People which can give you some comments and experiences from people just like you. Or if you’ve already used a debt management company (good or bad), please share your own review and let others know about your experience.