If you’re struggling to meet regular repayments on your credit commitments, especially on credit cards, personal loans, store cards or any other unsecured borrowings, a debt management plan (DMP) can take your debt burden off. But it can also make it hard to borrow money from lenders. This can affect your lifestyle and limit your financial spending.
In Summary, DMP can help you get your finances back on track, and improve your credit profile in the long run.
What is a debt management plan?
A DMP is an agreement that can be made between you and your creditors (people you owe money to) if you’re unable to make payments on time or have defaulted your creditor’s payment in last few months or you can now foresee that you would struggle to pay your bills . It allows you to pay a smaller amount each month than originally agreed. You’ll still have to pay off all your debt, but you can do it more slowly.
Is DMP for you?
Being approved for a DMP depends more on your disposable income (Monthly Income –Monthly Expence = Disposable Income) than the amount of debt you have .
To get a DMP, you’ll usually need to:
- Must have disposable income to make reduced and affordable monthly payments
- Be able to make partial settlement payments in future via family and friends support that you can clear your debts in a reasonable amount of time (your DMP provider will advise you on how long this is)
- Not have enough disposable income to completely repay your debts in reasonable time
Types of Debts under DMP Management
Only ‘non-priority’ debts can be included in a debt management plan, such as:
- Bank loans (Personal Loans)
- Credit cards
- Student loans
- Utility Bills (In Arrears ) and /or unpaid previous year bill or unpaid bills of past rental properties
- Benefits overpayments
- Tax Bill – Unpaid Self-Assessment tax and VAT or other HMRC Bill
- County Court Judgements via Monthly payment plan
- Unpaid Service invoice payment via monthly affordable payment
Debts that can’t be included in your DMP are called ‘priority’ debts, because there are more serious consequences for not paying them. These include:
- Mortgages and secured debts including bridging loans and second charge loans
- Hire Purchase agreements ( Car Finance loan)
- Magistrates’ court fines
- TV license fees
How does a Debt Management Plan work?
To set up a DMP, your creditors must agree to it. It may be in their best interests, as a DMP can help lenders get their money back.
A DMP is a informal debt plan and it isn’t legally binding, so it can be cancelled at any time by either you or your creditors. You are recommended to use a DMP provider who’ll give you debt advice, deal with creditors, calculate your payments and overall manage your all debt accounts so that you can feel free of debt worries after DMP agreement.
Once you start your DMP, you’ll only have to make one payment each month to cover all debts included in the plan. Your debt solution company will distribute this money between your creditors on a pro-rata basis (whoever owes more will get more from your monthly payment). The debt advisor will prepare all documents after full assessment. You’ll continue to make these payments until either your debts are cleared or you’re able to make the full or partial settlement via your debt solution company.
How will a DMP affect you?
A debt management program benefits your personal, Family and financial life by:
- Reducing stress and managing your debt without your regular involvement. It can be relieving to have lower, simpler payments, and someone to deal with your creditors for you.
- Protecting you from legal threat and debt collection process. Creditors who agree to your DMP are less likely to take legal action against you to get their money back, since they know you’re trying to sort out your debt.
- Continue your normal family and work life. A DMP can help you clear your debts and improve your financial situation in the long term.
There are some down-sides to getting a DMP. You may find they’re outweighed by the benefits, but it’s important to be aware of them:
- A DMP can reduce your credit rating. However, in the long run, it can be better for your score than getting into more serious difficulty with lenders with out DMP.
- You can get a default. Even if a creditor has agreed to your DMP, they may record a default on your credit report since you’re making reduced payments.
- Some creditors may still contact you If you’re struggling to pay off priority debts, you’ll have to deal with these lenders directly.
Will a DMP affect my spouse ?
Unsecured debts that you share jointly with your spouse or partner can be included in your DMP. However, your creditors may still contact them. So, you may want to consider setting up a joint DMP. You can do this even if your partner earns a different amount, or if they have other debts that aren’t shared with you.
Does DMP affect my credit score?
Your credit report reflects your chances of getting approved for credit. The higher it is, the better your chances. Lenders calculate your score when you apply for credit, using your credit report, application details and any other information they hold on you (e.g. if you’re an existing customer). Being on a debt management plan (DMP) may affect your credit file and score if it is not already affected before joining DMP. This is because you could be paying less than the minimum repayment amount you agreed to when you initially took the debts out.
How long does a DMP stay on your credit file?
Debts will stay on your report for six years, starting from the date they’re paid off or defaulted. A DMP means you’ll repay your debts more slowly, so your score may be negatively impacted for longer.
It is important to note unlike Bankruptcy and IVA , your DMP will not be recorded as a separate entry on your credit report.
Can I still borrow more money if I have a DMP?
It’s possible to get credit when you have a low score, although your options will usually have low limits and high interest rates. However, the terms of your DMP may mean you can’t borrow more money until you finish the plan. If you’re allowed to apply for credit, you should ensure you can afford the repayments.
You may struggle to get a mortgage while on a DMP. If you already own property, you might consider re-mortgaging to help pay off your debt. This can be difficult with a low credit score, but explaining your situation to lenders may help. There are various mortgage lenders who accept debt management client for new and remortgage application.
How can I improve my credit score after a DMP?
When your DMP ends, you can close the accounts you’ve paid off, or start making full payments again. Your score should recover over time if you continue to meet all repayments. Records of your debts will take six years to drop off your report, but lenders may pay less attention to them as they age. There are following points which surely help in improving credit scoring-
- Monitor your credit report regularly
- Reduce or clear your outstanding balances on credit cards and store cards
- Do not apply many new credit cards if you do not use them
- Check GAIN and CIFAS entries on your report ,if you find these ,Please take immediate credit report advice
- Pay off your CCJ /Court Judgements with in stipulated time of 28 days to avoid public records entry
- Pay your bills on time
- Be attentive on your credit report
Acme Credit Consultants offers range of debt solutions, It is important to take appropriate debt advice before choosing debt solutions as some debt solutions can severely affect your assets and ownership of tangible assets.