Debt Management Plans (DMPs) are an informal debt solution you can use to repay your debts at a reduced amount each month. Your Creditors must agree to it.
They allow you to repay you debts in an organised way and treat all your creditors fairly.
They are not a formal type of debt solution and are not a type of insolvency, which means they don’t involve you having to sell any assets.
As Debt Management Plans (also known as Pro-Rata Repayment Plans) are voluntary, all the creditors must agree to them and agree for interest, penalties, charges and fees to be frozen. They also need all Creditors to agree to freeze all future legal or debt recovery action.
How do Debt Management Plans Work?
The way a Debt Management Plan works, is you normally contact a money advice agency, like a Citizen Advice Bureau or Local Authority Money Advice Service.
They will use the Debt Advice Process to decide what is the correct option for you and will also draft an income and expenditure to see what income you have coming in and going out. This is to see what you have left each month and what you can afford to pay towards your debts.
They will also confirm how much it is you owe and identify who all your creditors are.
If you have enough disposable income, they then work out how long it will take for you, paying this amount, to pay off all your debts.
If you can repay your debts within a reasonable period, or if they are good reasons why you should not use a solution like a Trust Deed or a Bankruptcy, they may suggest that a Debt Management Plan is an Option.
How do Debt Management Plans work?
The way Debt Management Plans work, is once the Advice Agency that is helping you, works out how much you can afford, they then look at everyone you owe money to.
These creditors are then catergorised into either “Priority” or “Non-Priority” Creditors.
What are Priority and Non-Priority Creditors?
What constitutes a Priority and Non-Priority Creditor depends on the consequences of not paying that creditor.
So, for example, if you have mortgage or rent arrears, these are Priority Creditors, as if you don’t pay them, the consequences can be quite severe in that your home may be repossessed or you may be evicted.
Likewise, if a Creditor has a Court Order against you, or a Summary Warrant for Council Tax, they may also be a Priority Creditor, as a consequence of not paying them may be they will arrest your wages, freeze your bank account or even raise a petition for your Sequestration.
However, if the person you owe money is a credit card firm, or a firm that provided you with a store card, or a personal loan, and they have not taken you to Court, then these types of creditors may be classified as Non-Priority.
This is because, although the consequences of not paying them may be you get a Default Notice, this is not considered to be as severe as the consequence of not paying Priority Creditors.
Once the agency has identified the Priority Creditors, they will then contact and negotiate with these creditors individually, to see how much they will accept from you each month.
How they negotiate, will depend on the Creditor, but they may offer to pay off all your priority debts within a certain period, therefore, treating them all as equal.
In other cases, it may just come down to how much the Priority Creditor will agree to.
To do this they will provide them with a copy of your income and expenditure, which will show how much money you have each month to pay your debts.
They will also show them what other debts you have.
Once they have negotiated with your Priority Creditors, they will then negotiate with your Non-Priority Creditors.
To do this they will take your income and expenditure, work out your disposable income and then subtract from that how much they have offered your Priority Creditors. What is left is what they will offer your Non-Priority Creditors.
The way they do this is by offering them a pro-rata share of this money. The way this works is if someone has 10% of your total Non-Priority debts, then they get 10% of the funds available. If someone, has 50%, they get 50% of the funds available.
This is seen to be fair as it treats all Non-Priority creditors the same and they will all be paid off at the same time.
What Happens once your Creditors Agree?
Once your creditors agree to your repayment plan, you then must make the payments each month.
Some Advice services offer a Payment Distribution service for this, which means you make one payment per month and they pay all your debts for you. If the Agency does not offer this service, you may have to make the payments yourself, which means making multiple payments each month.
Freezing Interest, Penalties, Fees and Charges
It is important when your Advice Agency negotiates with your creditors, they also try and get all the interest, penalties, fees and charges on your debts frozen, otherwise, depending on how much you are paying, your debts may increase rather than go down.
It is also important the Creditors agree to stop all debt recovery and legal debt recovery action, otherwise, you will not get the relief you are hoping for.
Most creditors will usually agree to do both these things, but only for a limited period of time, then they will expect the Advice Agency to review your circumstances and draft a new income and expenditure, to see if you can afford to pay more.
How do Debt Management Plans affect your Credit Score?
Debt Management Plans normally have a detrimental effect on your credit score, as you are no longer making your contractual payments each month, so legally are in default with your agreement and will go into arrears.
You may, therefore, receive a Notice of Arrears or a Default Notice and this will normally damage your credit score and your ability to borrow again.
What is the Difference between a DMP and the Debt Arrangement Scheme?
Both Debt Management Plans and the Debt Arrangement Scheme are fundamentally the same to some extent. They allow you to repay your debts in full. However, there are some very important differences.
The Debt Arrangement Scheme, if approved automatically freezes all interest and charges, so it is not necessary for your Creditors to agree to it.
Also, once a Debt Payment Programme in the Debt Arrangement Scheme is approved, all debt collection activity and legal debt recovery action must stop. You also cannot be Sequestrated (Bankruptcy).
Another huge advantage of the Debt Arrangement Scheme is it does not require all creditors to agree. If those Creditors who object have less than 10% of your total debt, it is automatically approved; if they have more, it goes to a Fair and Reasonable Test, which means the Debt Arrangement Scheme Administrator can force all the Creditor to accept it, if he believes it is fair and reasonable.
Also, in the Debt Arrangement Scheme, everyone must have their debts repaid through a Payment Distributor, so you only make one payment per month and they pay all your debts for you.
What are the Advantages of a Debt Management Plan?
To be fair, there are few advantages of a Debt Management Plan over the Debt Arrangement Scheme, so if someone suggests you should enter one, you should ask why the Debt Arrangement Scheme is not a better solution.
There may be some exceptional circumstances when a Debt Management Plan will be a better solution, such as when you need something more flexible, which a DMP may offer, as it is informal.
However, this is likely to be the exception rather than the rule.
