Debt Management Plans explained

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A Debt Management Plan (DMP) is a non-binding agreement between an individual and their creditors to repay debts. It is typically used when a borrower can only afford to pay creditors less than their contractual repayments.

Borrowers can organise a DMP themselves, but they will generally approach a specialist company. These firms are licensed by the FCA and will arrange a plan with creditors, often for a fee. The borrower can at any time choose to pay their creditors directly, transfer it to a different debt management company or close the DMP completely.

What do debt management companies do?

A debt management company will work with a borrower to understand full details of their income, financial commitments and household expenses to work out a realistic monthly payment. The company will then attempt to agree a reduced monthly payment with each of the creditors.

Creditors don't have to agree to the DMP but will often decide that it's better to receive reduced amounts on a regular basis through the DMP, rather than irregular payments direct from the borrower or even no payments at all.

Once a DMP is in place, the borrower makes the agreed regular monthly payments to the debt management company, which shares the money out between the creditors as agreed.

Credit records

A DMP may not show on a borrower's credit file as debt management companies don't always register anything directly with the credit agencies.

However, creditors that are part of the plan may choose to register the DMP. For this reason, the same DMP may appear multiple times on the credit file.

There may also be occasions where a creditor may incorrectly register an Arrangement to Pay as a DMP with the credit reference agency.

Alternative arrangements

A DMP is an agreement between a borrower and their creditors to reduce monthly payments but ultimately repay the debts in full. It differs from other types of arrangements:

  • Arrangement to Pay - an informal agreement with just one creditor to reduce payments for a specific period of time
  • Individual Voluntary Arrangement - a form of insolvency where a percentage of the debt is written off
  • Debt Relief Order - an alternative to bankruptcy for individuals that meet specific criteria that enables them to write off all their debts.
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