If you're struggling to keep up with debt payments on things like credit cards, loans and store cards, a debt management plan (DMP) may be right for you.
This page explains what a DMP is, how it works and what you need to think about before getting one.
What are priority and non-priority debts?
Priority debts include:
mortgage or rent arrears
gas and electricity arrears
council tax or rates arrears
magistrates' court fines
arrears of maintenance payable to an ex-partner or children
income tax or VAT arrears
TV licence or TV licence arrears.
They're called priority debts because the consequences of not paying them can be more serious than for other debts. You usually can't include these debts in a DMP - check with the DMP provider. You'll need to choose another debt solution for your priority debts if you can't put them in a DMP.
Non-priority debts are less urgent and include things like bank loans, credit cards, student loans, water charges and benefits overpayments.
What is a DMP?
A DMP is an informal agreement between you and your creditors for paying back your debts.
You pay back the debt by one set monthly payment, which is divided between your creditors.
Most DMPs are managed by a DMP provider who deals with your creditors for you. This means you don't need to deal with your creditors yourself.
A DMP is not legally binding, meaning you're not tied in for a minimum period and can cancel it at any time.
Is a DMP right for you?
A DMP may be a good option if the following apply to you:
you can afford your living costs and have a way to deal with any priority debts, but you're struggling to keep up with your credit cards and loans
you’d like someone to deal with your creditors for you
making one set monthly payment will help you to budget.
However, you need to be sure you understand the impact a DMP will have:
it may take longer to pay back your debt because you'll be paying less each month
your creditors won’t necessarily freeze the interest and charges on your debts, so the amount you owe might go down by less than you think
your DMP provider might charge you a fee, although there are several free providers you can use so there’s no need to pay if you don’t want to
your creditors might refuse to co-operate or continue to contact you
the DMP may show on your credit record, making it harder for you to get credit in the future.
If you’re unsure about whether this sounds like it’s right for you, you might want to think about other options for dealing with your debts.
Joint debts and DMPs
If you have a debt in joint names with someone else, this can be included in your DMP. However, your creditors may still chase the other person for all of the debt. This is because whenever you take out a credit agreement, such as a loan or bank account, with another person, you're both liable for the full amount of the debt. This is known as joint and several liability.
If both you and your partner are struggling with debts, you might want to consider setting up a joint DMP where you'd both be equally responsible for the repayment plan. It doesn't matter if you have different levels of income or debts. You can also include debts that are only in one name in a joint DMP.
How to get a DMP
If you’ve decided a DMP is right for you, you’ll need to follow these steps to set one up:
make sure you've sorted out your priority debts first
work out your budget to see if you have enough available income to make your monthly payment
choose a DMP provider, remembering that you can choose a free provider
check the agreement or contract carefully.
Next steps
FAQs
The cons of Debt Management Plans
This can slightly lower your credit score, because closing multiple accounts at the same time affects the length of your credit history. However, that score will increase with on-time payments and because the debt is paid down faster on the DMP.
Which step is essential before you consider a debt management plan? ›
How a Debt Management Plan Works. The first step is to review your financial situation with a nonprofit credit counselor before you agree to a debt management plan. This will help the counselor design a plan that meets your needs.
Are debt management programs a good idea? ›
Become debt-free within five years: Under a debt management plan, you typically pay off all of your existing accounts within five years. Simplify your payments: Instead of having multiple payments and due dates to remember, you'll make just one payment to the credit counseling agency.
Does a DMP hurt your credit? ›
Your creditors might note on your credit reports that you're using a DMP to pay the account, but it won't directly affect your credit score.
Which debts can t you pay off with a debt management plan? ›
DMPs generally don't include secured loans, like mortgages and auto loans, and some types of unsecured loans, such as student loans. Counselors may be able to offer guidance on how best to repay these debts, but you'll generally need to manage the payments on your own.
Can you keep a credit card on a debt management plan? ›
You're required to close your accounts
Any credit card that is included in your DMP is required to be closed. Here's how it works — the creditor, which is typically a bank or other financial institution, works with MMI to create a DMP, which usually includes reduced interest rates on your credit card accounts.
What is the average interest rate on a debt management plan? ›
Every participating creditor offers their own rates, but in aggregate, the average interest rate for accounts included on a debt management plan with MMI is below 8%.
Can I pay off my debt management plan early? ›
You are merely hiring someone to liaise with your creditors and divide your monthly payment between them. If your circ*mstances improve and you find yourself in a better financial position, you can pay off your debt management agreement early.
How long does a DMP stay on your credit file? ›
The accounts you are repaying your DMP through will already be listed on your credit report, and once the DMP is complete the marker will be removed and the accounts themselves will be marked as closed – they will then remain listed for six years from the settled date.
Can I keep my bank account with a debt management plan? ›
Your Bank Account & A Debt Management Plan
In conclusion, a Debt Management Plan (DMP) does not directly affect your bank account. You can usually continue using your current bank account as usual when you enter a DMP providing that you do not wish to include a debt on your DMP that is with your bank account provider.
Include all of your debts.
Make sure all of your debts are included in the DMP, even if you think you can manage that catalogue payment or want to keep your overdraft 'for emergencies'. Sometimes you might have missed a debt from your plan, so be sure to let your DMP provider know about any changes as soon as possible.
Can I get a loan while on a DMP? ›
A debt management plan affects your credit file. Most mainstream banks and lenders will be reluctant to lend to you once they see your credit file and they know you are on a debt management plan. The plan works by you making reduced payments, so defaults will appear on your credit file.
Why would a DMP be rejected? ›
Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.
Is a DMP a bad thing? ›
However, lenders will sometimes agree to freeze interest rates and charges during your DMP. 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. You can get a default.
Do most creditors accept a DMP? ›
Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.
What is one advantage and one disadvantage of using a debt management plan? ›
You must make consistent payments to keep the benefits
In order to keep the benefits of your debt management plan—lower interest rate, smaller monthly payments and more—you must make consistent monthly payments. If you don't, you might lose the benefits.
