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How to know if a debt management plan (DMP) is right for you

How to know if a debt management plan (DMP) is right for you
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If you are worried about your debt – be it credit card, personal loan or overdraft debt – a debt management plan is one way for you to bring it under control. Let’s take a look at what a debt management plan is and whether it might be right for you.

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What is a debt management plan?

A debt management plan (DMP) helps to bring all of your debts together into one monthly payment.

It is suitable for non-priority debts. By that, we mean things like credit card, store card, personal loan or overdraft debt. It won’t work for debts like outstanding child support payments or council tax arrears.

A debt management provider will calculate an affordable monthly payment for you. Instead of you having to make multiple payments to lots of different creditors, you will then just need to make one to your debt management provider and it will pay all of your creditors.

How much does it cost?

Before committing to any sort of debt solution, it makes sense to speak to a non-profit debt counselling service like StepChange or Citizens Advice. These organisations are charities and they offer fee-free services. 

However, if you decide to go with a fee-charging debt management provider, then just check they are authorised by the Financial Conduct Authority. You can expect to pay some sort of set up fee and then an additional fee each time you make a payment.

Fee-charging providers will argue that as they are being paid by you, and not the banks or creditors, they will provide you with a better service. But if you don’t want to pay a fee, then there are fee-free options available.

How long does it last?

Debt management plans vary in length. It very much depends on what your level of debt is and how much you can afford to pay each month. However, the average length tends to be in the region of five to 10 years.

Does getting a debt management plan hurt my credit score?

It is worth knowing that getting a debt management plan can hurt your credit score and make it more difficult for you to borrow in the future. Your DMP will show up on your credit file, and if you are still paying it off, then it may put lenders off.

However, if you keep up with your DMP payments, then it could actually work in your favour. It will look better than unpaid debts or debts you are only making infrequent payments towards.

How could a debt management plan affect my mortgage?

If you already have a mortgage in place and you keep up with your monthly payments, then a DMP should have no direct impact on your mortgage or your ability to keep your home.

However, if you are planning to apply for a new mortgage, then you may find this difficult if you have a DMP in place. This is because it will show up on your credit file and you will be seen as a higher risk.

Can creditors refuse a plan?

Being completely upfront, yes, creditors can refuse a debt management plan. This could be for a wide variety of reasons; such as they don’t want to accept reduced payments, or they don’t approve of you using a fee-charging provider.

What this means for you is that they could still take action to recover the money you owe. If you find yourself dealing with a creditor who won’t agree to a DMP, then consider contacting them yourself. You might be able to negotiate with them to agree to a DMP on mutually beneficial terms. Just be aware they have no legal obligation to do so.

Is a debt management plan right for me?

Not all debt solutions suit every situation. So before committing to a debt management plan, you will need to think about whether it is right for you.

A DMP is a good idea if:

  • You can only afford a small amount each month to pay off your debts.
  • You have debt problems but will be able to make repayments in a few months.

A DMP is not such a good idea if:

  • Your debts are priority debts (court fines, TV licence fee, council tax, etc).
  • You don’t think you will be able to make regular monthly payments to the debt management plan.

Where can I find more information?

If you want to know what other debt solutions are available, then take a look at our get out of debt guide.

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