What Are the Pros and Cons of a DMP?
A Debt Management Plan – or DMP – is a type of repayment plan that allows you to stretch out your debts so they’re more manageable.
It functions like an IVA but without the same restrictions – and without the same legal protection. This is because a DMP is an informal, non-legally-binding process, presenting its own set of positives and negatives.
So what are the advantages and disadvantages of a DMP? And is it the right solution for you?
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The Advantages of a DMP
The Plan Is Affordable
When drawing up a DMP, you’ll consult with a Debt Management Company to review your income and your monthly living expenses.
Any plan that you make will have these considerations factored in, making sure that your repayments leave you with enough cash to keep up with your everyday life.
You Might Be Able to Freeze Interest and Charges On Debt
When you propose your plan to creditors, you may be able to convince them to freeze any interest or charges on your debt.
This is because a Debt Management Plan is a sign of good faith. It reassures creditors of your intent to repay. Creditors are also likely to agree as they are aware that tacking on additional interest may leave you unable to repay the amounts, causing them to lose out in the long run.
Could Be Debt-Free Within 5 Years
Although the length of the DMP depends on the scale of your debt and how much you’re able to repay each month (sometimes taking up to 10 years), the agreement usually sees individuals become debt-free in around 5 years.
Simplifies Repayments
If you have a lot of creditors, it can be confusing trying to keep track of them all. Payments falling on random days throughout the month can make it harder to keep track of your finances and budget effectively.
When you enter into a DMP, you’ll make one payment to your Debt Management Company, which will then divide it up between your creditors on your behalf.
No Formal Restrictions
Unlike other insolvency procedures – such as bankruptcies or IVAs – there are no formal restrictions placed upon you. This means you won’t have to worry about knock-on effects on your employment or assets.
Don’t Have to Deal with Creditors
One of the most stressful aspects of debt is the constant, near-harassment from creditors. Once you’ve entered into a DMP, your Debt Management Company will handle communications with your creditors, helping to restore your peace of mind.
The Disadvantages of a DMP
The Process Isn’t Legally Binding
This is probably the biggest drawback presented by Debt Management Plans.
Your creditors won’t be legally bound to honour the agreement, so they can go back on its terms at any time. They may start contacting you, begin adding on interest, or pursue legal action against you to recover their money.
If your financial situation isn’t very stable, one errant creditor going against the agreement could be enough to tip the scales, which could potentially cause you to declare bankruptcy.
No Debts Are Written Off
Unlike other insolvency procedures, Debt Management Plans don’t offer the chance to write off your debts.
Other insolvency procedures have fixed terms where any outstanding amounts are written off at the end of the timeframe. This means that debt management plans can cost you more money in the long run.
It Can Be a Long Process
Some insolvency procedures, such as bankruptcies or DROs, are completed after 12 months. Debt Management Plans, however, can take considerably longer.
DMPs require you to pay the debt in full. Factoring in the reduced monthly payment amounts, this can sometimes take up to 10 years.
Negatively Impacts Your Credit Score
While a DMP isn’t officially listed on your credit record like other formal insolvency procedures, it will still have a negative impact on your credit score. This is because you’ll be making repayments at a slower rate than originally agreed upon.
Is a DMP Right for Me?
A Debt Management Plan is typically the right choice for someone who is struggling with debts but is still capable of repaying them. For debts that are large and unmanageable, a more formal solution is probably more appropriate, thanks to the increased security they offer.
It can be hard to determine whether or not our debts are manageable or not – stress may make us catastrophise the situation, or denial may lead us to ignore the true scale of the problem.
If you’re struggling with debt, you should get in touch with an insolvency practitioner, like those of our team. We can help to assess your situation and let you know whether you’re well-suited to a DMP, or an alternative solution such as an IVA.
Get in touch to book a free consultation today.
