If you’re reading this, it’s likely you’re struggling to repay your debts and want to get out of this sticky situation. Really, you might be under a lot of stress with notices and calls from creditors. However, it is possible to be free from non-priority debts like credit and store cards, overdrafts and personal by using a Debt Management Plan (DMP). A DMP allows you to repay your borrowing at an affordable rate and without tension or worry. Read to know how you can become free from debt faster…
What Is A Debt Management Plan And How Does It Work?
To understand what a Debt Management Plan is, you need to first distinguish between priority and non-priority debts. Priority debts are those that may come in for legal action if not paid on time. For example,
- Council Tax
- Court Fines
- Gas and power bills
- Financial support for child and maintenance
- Mortgage, rent or any secured loan against your home
- Income Tax, National Insurance and VAT
Non-priority, on the other hand, are followed by less serious consequences e.g.
- Student loans,
- Credit cards,
- Water charges
A DMP is an informal agreement between your creditors and yourself to clear non-priority debts on an immediate basis. You pay a single monthly amount that’s divided among the creditors. A Debt Management Plan provider will manage your debts on your behalf. It’s not legally binding, you can cancel the plan anytime you wish. How much you’ll pay is decided by the debt counsellor after taking into consideration essentials like mortgage, council tax bills and living costs. If your financial condition improves, you repay back and if you lose your job, you might have to pay nothing.
Can I Get A Debt Management Plan?
It’s more a question of how much disposable income you have rather than whether you can get a Debt Management Plan or not. Generally speaking, you should fall into the following criteria to think of a DMP:
- Have enough income left after essential to make reduced monthly payments
- Be able to clear your loans in a reasonable amount (your DMP provider will advise you regarding this)
- Don’t have enough disposable income to pay off debts within six months
Who Can Offer A Debt Management Plan?
Free debt advisers work with debt advice charities or firms to help people get freedom from debt sooner. They can arrange a Debt Management Plan which you can pay into. Advisers and counselors are highly trained and understand all types of financial circumstances. If you can afford, there are also paid DMP providers but check for their FCA authorization beforehand.
How Does A Debt Management Plan Affect My Life?
A Debt Management Plan is helping you manage your debts and creditors more easily, so it’s definitely a good thing. A DMP can have good and not-so-sweet effects on your personal and financial life. Let’s take a look…
- Reduction in Stress Level:
You make lower payments to creditors than what you had agreed at the time of signing on the dotted line. Also, it’s a great burden off your shoulders to have a trustworthy person dealing with creditors for you.
When you apply for a Debt Management Plan, it shows creditors that you’re making a proactive effort to turn your finances around. So, they’re less prone to taking legal action against you.
- Healthy Finances:
A DMP provider can make your finances healthy and clear you from debt.
Although the benefits far outweigh the downsides, it’s important to be aware of them…
- Paying more Interest is possible:
As interest rates are calculated on a daily, monthly or yearly basis, you may end up paying more in interest if you extend the term of your loan. Yet, lenders may agree to freeze charges and interest rates during your Debt Management Plan.
- Reduction in your Credit Rating:
A slight reduction in your credit score can’t be discounted, but it’s better for the long run than getting into serious issues with lenders.
- Getting a Default:
Creditors may agree to a DMP but may record a default on your credit file for reduced payments.
- DMP providers’ Fee:
You may have to pay a fee. You can always go for free or charity debt advice and DMP providers.
- Paying Off Priority Debts:
You have the backing of a Debt Management Plan provider for non-priority debts only. You’ll have to deal yourself with creditors of priority debts.
How Does A Debt Management Plan Affect My Spouse?
You can include any non-priority debts of your spouse in your DMP. Creditors may still contact them, so set up a joint Debt Management Plan. This can be done even if your partner earns a different level of income and has debts not shared with you.
How Will A Debt Management Plan Affect My Credit Score?
When you apply for a loan with lenders, they’ll calculate your credit score with the help of your credit report, application details and other history (if you’ve already borrowed from them earlier). Frankly, the higher the score, the better are your chances of getting approval. Those who opt for a Debt Management Plan have problems managing their debt which show on their credit file in the form of reduced payments. Lenders refuse or avoid high-risk applicants. Thus, if you apply for credit while on a DMP, you may not be that successful.
How Long Does A Debt Management Plan Show On My Credit Report?
Debts, whether paid off or defaulted, stay on credit reports for a maximum of six years. A DMP means you take longer than expected to repay your loan, thus further denting your credit score. That you’re managing your debts with such a plan and advisor obviously won’t show on your file. But, creditors usually add a DMP ‘flag’ to their accounts so that anybody knows you’re keeping to the agreement.
How Can I Improve My Credit Score After A Debt Management Plan?
Your Debt Management Plan will end one day. Once this happens, you can close paid off accounts and start making full repayments again. It takes time for your score to improve. Lenders pay less attention to a DMP as the years go by.
How To Set Up a Debt Management Plan
- Separate priority debts from the non-priority ones
- Decide whether DMP would be right for you
- Make a budget
- Think about whether you want a free or paid DMP provider
- Choose a DMP provider