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What is a debt management plan?

Wednesday 28th December 2022

What's it all about?

This article' designed to help you:

Understand what a debt management plan is
What they do
And if one is right for you?

Most people have debt. A mortgage, personal loan, store or credit card are all forms of debt. It’s only when you can’t repay a debt that it becomes a problem. It’s important to remember that, in our society, people blame themselves for difficulties with debt but, as is becoming all too clear, it is often circumstance that can put people into perilous situations. For example, perhaps your mortgage was affordable but now rising interest rates put your monthly repayment well beyond your means – which very many people are finding right now. So, first things first: don’t blame yourself. This only adds to your stress. Also, burying your head in the sand will only make it worse. Take a deep breath, remind yourself anyone can get into debt difficulties, and do something about it. That begins with getting a clear picture of your own personal financial situation and doing a little digging to find the best option for you. To help you get started on a solution, check out our helpful guide to some of the options open to you…

Missed a payment or two but think you can get back on track?

Maybe a financial catastrophe – like a big car repair bill, unforeseen home expense or being out of work for a while – has eaten into your monthly outgoings and you’ve fallen behind with repayments. Don’t worry – the answer is easier than you think!

Most companies are very understanding and will have dealt with this for other customers. Get in touch to explain the situation and ask if you can spread out any outstanding payments to ensure they are affordable for you. It’s in their interests to help you to stay on track.

You can start by getting together your personal budget, showing your income and outgoings and money you have left over each month. Then you can offer to make affordable repayments.

Would a tax refund help?

An average 4-year tax refund from RIFT comes in at around £3,000. That could be enough to get you out of a financial pickle or at least help you to tick over while you get back on track. 2 out of 3 people don’t know they qualify for a tax refund.

Check if you have a claim
Overwhelmed with debt and can't see a way out?...

There are many businesses out there who can help you to manage your debt over the longer term. They of course charge fees for their service, so while your monthly outgoings go down or least become more manageable, you will end up paying more to service and pay off your debt. Our best advice? Get help from a debt charity...

There are a few charities dedicated to helping people with debt that operate nationally. They are expert in this area and their services are FREE. They can help you to negotiate the debt maze and find your way to a manageable situation. Most importantly, they won’t add anything to your debt with fees or charges.

Here’s our top 3:

StepChange

A dedicated debt charity, StepChange offers the advice and support you need to get your finances back on track.

Their website has a debt advice tool that can help you to create a budget, personal action plan and guide you with practical next steps.

If you want to speak to an advisor, call 0800 138 1111. Lines are open Monday to Friday, 8am to 8pm and from 8am to 4pm on Saturdays.

Citizen’s Advice

Debt advice is just one of the services Citizen’s Advice offer across England. They have offices across the country and many have specialist caseworkers in their teams who can help you with anything from repossessions to negotiating with creditors.

Visit their website to chat online with a real-life advisor or call 0800 240 4420 for general enquiries.

Adviceline (England): 0800 144 8848

Advicelink (Wales): 0800 702 2020

National Debtline

Run by the Money Advice Trust, National Debtline has been helping people with free and confidential advice for more than 25 years. Their expert advisers have helped millions of people to improve their situation and take control of their debts.

You can get advice online, via webchat or over the phone: call 0808 808 4000 Monday to Friday, 9am to 8am and on Saturdays between 9.30 and 1pm.
What is a debt management plan and should you get one?

According to Moneyhelper.org, a Debt Management Plan (DMP) is something that: “…allows you to pay off your debts at a rate you can afford.”

It might be for you if you have non-priority debts (see below). Any good Debt Management Plan provider will help you to work out your budget and put together an affordable payment plan.

First off – do your research. The simplest way to do that is to get advice from one of the debt charities. Tell them about your circumstances and they can advise on the best course of action for you. As a rough guide, you can qualify for a DMP if your budget can cover at least £5 or more to pay each of your creditors. You make one single monthly payment to the Debt Management Plan provider who will pay your creditors for you. This makes the payments easier for you to manage.
Know your priority and non-priority debts
Non-priority debts include things like bank loans, credit cards, student loans, water charges and benefits overpayments. These can be included in a DMP.

Priority debts can’t be included in a DMP as stopping paying them has more serious consequences than non-priority debts.

According to Citizens Advice, priority debts include:
- Rent arrears
- Mortgage arrears or secured loan arrears
- Council tax arrears
- Gas or electricity bills
- Phone or internet bills
- TV licence payments
- Court fines
- Overpaid tax credits
- Payments for goods bought on hire purchase or conditional sale
- Unpaid income tax, National Insurance or VAT
- Unpaid child maintenance
You should get advice on paying your priority debts before you set up a DMP.

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Debt management plans - The PROS

It’s easier to manage.

If you have multiple debts, you can say goodbye to managing multiple payments each month. You agree one affordable amount and pay it to your DMP manager. That’s a lot less stress!

You may pay less interest.

Your DMP manager may be able to negotiate a lower interest rate which means you accumulate less debt over time. Lower interest rates also often men lower monthly payments.

You’ll save money.

Most people with a DMP save money. That’s because lower interest rates and an accelerated repayment time over the course of the plan can save you more money.

Your credit score should recover.

This isn’t guaranteed but because a DMP makes it easier to stay consistent in your repayments and reduce your debt quicker, these factors can contribute to making your credit score higher.
Debt management plans - The CONs

If you have a credit card, your account will be closed.

Once you’ve entered into a DMP, your account will be closed and it’s unlikely you’ll qualify for any further credit. This is to ensure you don’t take on any more debt while you have debt outstanding.

You must be consistent.

If you don’t meet your new monthly payments consistently, you may lose the benefits of the plan. DMPs work best for people who want financial change and to keep their agreement.

Creditors don’t have to agree to a DMP.

While most will, creditors aren’t obligated to enter a DMP. Your Plan manager will of course negotiate with lenders on your behalf but an agreement isn’t guaranteed and they may continue to pursue you for outstanding debt.
Say no to fees

Your Debt Management Plan does not have to cost you anything. There are companies out there who will charge you fees – they are in business to make money after all. And you are free to choose any of them.

You can weigh up the costs yourself: they may be saving you money on interest and over the period of the plan. But if that benefit is outweighed by fees, then it will cost you money.

All of the charities we listed above, plus a few more, will help you to set up and manage a DMP for free.
Make sure your protected

If you decide to go with one of the many debt management companies out there, make sure they are authorised by the Financial Conduct Authority (FCA). It may seem like an obvious step but it’s an important one!

RIFT Round-up

Finally… if you want more information about being savvy with money:

Read our guides for more money saving advice and sign up to our newsletter to get them delivered free every week.
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Subscribe to our YouTube channel for our video guides on how to make the most of your money
Use our handy tools and spreadsheets to help with budgeting and saving
Read our guide answering all your questions about divorce and debt.

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