How does debt management work?

If you have numerous debt repayments coming out of your account each month and you’re struggling to keep a handle on how much you owe, a Debt Management Plan (DMP) may be able to offer a solution.

What is a DMP and how does debt management work?

This type of debt solution effectively allows you to manage your debts and pay them off over time. It isn’t legally binding, so you can leave whenever you want and you won’t need to contact your creditors yourself if you work with a debt management company – such as PayPlan – to set it up.

A DMP consolidates your debt repayments into one, manageable monthly repayment – so you don’t need to worry about how much is going to who, as all of your creditors are accounted for with one transaction.

How does it work?

Here at PayPlan, we can help you set your DMP up and there are no fees to worry about. We will work with you to put together a monthly budget, looking at your income and expenses to determine how much disposable income you have to put towards your DMP.

Your needs are always considered first, so we’ll take into account how much money is needed to pay your everyday bills, such as rent or mortgage payments and utility bills, to make sure nothing is left out.

You will then set up a Direct Debit for an agreed amount to be paid to us – and we will then arrange for this to be distributed each month to your creditors, so all the hard work is done for you!

Things to consider when taking on a DMP

While this debt solution is really effective – and perhaps the best choice for many people who simply want to get their debt repayments back on track – there are a few things to think about.

Your creditors may still contact you

A DMP is an informal agreement so, unlike an IVA (Individual Voluntary Arrangement) or DRO (Debt Relief Order), creditors can still send you letters or call you chasing for payment. They can also continue to add charges and interest to what you owe – which means it could take longer to repay your debts.

You can ask creditors to freeze the interest on what you owe but it isn’t guaranteed they will agree to this.

Your credit rating may be affected

As you will be making lower monthly repayments on your debts, this could impact your credit report as it will be noted on there. However, once the debts are repaid, you will be able to tackle your credit rating and steadily improve this again – read our guide to find out how to do this.

It may take longer to repay your debts

A DMP remains set up for as long as it takes for your debts to be repaid. Unlike an IVA, which guarantees your debts will be cleared after 5-6 years, or a DRO, which only lasts 12 months, there will be some uncertainty around how long your DMP will last.

You can only include unsecured debts

This means you won’t be able to include debts, such as your mortgage or car finance deals, which are secured against your home or vehicle. Here is a quick run-down of the debts which can be included in a DMP:

• Overdrafts.
• Credit cards.
• Store cards.
• Catalogues.
• Personal loans.
• Utility bills.
• Mobile phone contracts.
• Benefits overpayments.

The pros of a DMP

We’ve broken these down into detail below:

You’re not legally bound by the agreement

This means you can leave anytime with no repercussions – you’ll simply need to notify the debt management company and let your creditors know.

You won’t have to deal with creditors

The debt management company you use should deal with creditors on your behalf, which means you can get back to living without worry.

You will only pay what you can afford

As your monthly repayments are based on your income and expenses, this means you will never pay more than you can afford. You will also have the flexibility to renegotiate how much you put into your DMP if your circumstances change.

For further information on what to consider when taking on a DMP, take a look at our comprehensive FAQ section here on the site.

What next?

All debt solutions are different. What might work for one person may not be as effective for another. That’s why it’s a good idea to speak to an impartial debt advisor, who can help you work out what the best solution is for your situation.

Our team of experts are on hand to answer any questions you may have about your debts or a debt solution such as a DMP. You can reach the team at PayPlan on 0800 316 1833 or fill in the contact form here for a callback.