Debt Management Plans (DMPs) explained

DMPs have benefits as well as drawbacks, so you should look at all the debt solutions open to you, including Individual Voluntary Arrangements (IVAs), bankruptcy or Debt Relief Orders (DROs) before you make a decision.

Here we look at the features of a Debt Management Plan and help you decide if it's the best solution for you. As with all debt solutions and debt management companies, it's important to seek professional, impartial advice before making your choice.

What is a Debt Management Plan?

A Debt Management Plan is an agreement between you and your creditors to pay all debts in instalments. Debt management plans are normally set up when you can only afford to pay creditors a small amount each month or make repayments in a few months.

You also may be able to freeze or suspend interest charges, which will help you clear your debts even faster.

Debt Management Plans are set up and managed by debt management companies (DMCs), who typically charge a fee for their services, which will be included in the repayments you make.

Both the National Debtline and the StepChange Debt Charity offer free Debt Management Plans.

Once your free Debt Management Plan is set up, you'll only need to make one monthly payment to the debt management company. The DMC will then share the money fairly between your creditors.

Debt Management Plans don't have a fixed lifespan. So your DMP could last for a number of years, depending on how much you owe and how much you can afford to pay each month.

Can I get a Debt Management Plan?

Before you can get a Debt Management Plan, you'll need to work out your personal budget to see if you have enough cash to be able to make monthly payments.

Step 1: Make a list of your income (all the money you earn).

Step 2: Make a list of your expenses (e.g. rent or mortgage payments, household bills, childcare costs, travel and food). Remember that priority debts can't be included in your Debt Management Plan (see the section below on priority debts).

Step 3: Deduct your expenses from your income. The remaining money is your available income. Available income is money you can use to repay your debts.

You'll need a minimum of £100 per month to pay towards your DMP.

Priority debts and Debt Management Plans

Debt Management Plans only deal with your credit debts (loans, credit cards, store cards, overdrafts), so you'll need to repay priority debts separately. You must include payments towards your priority debts in your personal budget; otherwise your DMP may not be accepted.

Priority debts include:

• Rent or mortgage payments

• Gas and electricity bills

• Council tax

• Magistrates fines

• Inland Revenue / VAT

Where can I get a Debt Management Plan?

Your DMP can be set up and managed by a debt management company (DMC) or a debt charity. It's best to seek out an expert who can give you advice on Debt Management Plans and answer any questions you have.

If you decide a Debt Management Plan is the right option for you check the contract carefully before signing. Make sure that:

• You can cancel at any time if you're not happy with the service.

• The correct debts are covered by the Debt Management Plan.

• You can reclaim the fee if you cancel the agreement.

• The fees are clearly explained.

Benefits of Debt Management Plans

With a Debt Management Plan:

• You'll only have one monthly payment to worry about.

• Some of your creditors will stop calling and writing to you.

• You won't have to contact your creditors because your debt management company will do that for you.

• You may be able to reduce or freeze interest charges.

• You'll be able to reduce your repayments to a level you can afford.

Drawbacks of Debt Management Plans

A Debt Management Plan may be unsuitable because:

• It could take years to repay your debts.

• Debt management companies do charge a fee for their services, which will mean it takes longer to repay your debts.

• You can't afford to pay £100 per month to your creditors.

• Your debts are less that £5,000.

Are debt management companies right for me?

There are many ways to break free from debt, but each option comes with drawbacks. Alternatives to a DMP include Debt Relief Orders, IVAs, debt consolidation and simple budgeting.

Any debt relief measure is a major decision that you should only take after seeking professional advice. The Citizens Advice Bureau, StepChange Debt Charity and National Debtline all provide free, impartial advice.