Using a debt management plan to reduce your monthly payments may sound like a great idea but this debt solution also has its drawbacks. Whether or not a debt management plan will work out for you depends on many factors including your income, the level of your debt, and your unique financial situation.
If you’re struggling with debt issues, you must educate yourself on all your options and speak to a qualifed debt advisor about your financial challenges. Thinking things through and weighing out your options with a qualified expert can help you decide whether debt management plans are the right debt solution for you.
At Money Advisor, we pride ourselves on offering resources, guidance, and help to borrowers who want to proactively manage their debt problems. Below, our debt advisors have outlined the major pros and cons of debt management plans (DMP) so you can decide if a DMP will work for you:
The Basics: What is a Debt Management Plan?
Generally negotiated by a debt management service, a debt management plan is an informal agreement between a borrower and their creditors. In a DMP, the creditors agree to accept lower fixed monthly payments from a borrower over a long period, making it easier for the borrower to condense their unsecured debts and reclaim control over their finances.
Under DMPs, some creditors may also agree to freeze the borrower’s interest, penalties, and charges on existing debt to help them repay what they owe in full. That solely depends on the creditor’s discretion.
Since a DMP is not a legally binding debt solution, it is a lot more discreet compared to extreme insolvency measures like bankruptcy or sequestration in Scotland. While a DMP will affect your credit score, it will not appear on any public registers.
Read More: Debt Management Plan (detailed)
Pros of DMP
Let’s look at some of the advantages of DMP:
Single, Affordable & Fixed Monthly Payment
If you owe money to multiple creditors, a DMP may work out for you because it rolls all your repayments into a single, hassle-free, and fixed monthly payment to your debt management agency.
The debt help borrowers receive from debt management services is vital when it comes to DMPs. Borrowers submit their single monthly payment to their agency which then disburses it to creditors on their behalf.
This way, you don’t have to bother with the hassle of tracking repayment dates or making multiple payments during the month. You only have to make one combined payment to your debt management service.
Ends Creditor Harassment
DMPs offer some relief to individuals suffering from creditor calls, intimidation, and harassment. If your creditors have already agreed with your debt management proposal, they will feel little need of contacting you or badgering you to repay.
Moreover, your debt management agency will handle most negotiations and correspondence with your creditors on your behalf, meaning you’ll be in safe and professional hands.
Decreased Monthly Payments
Debt management services are experts in negotiating with creditors for lower interest rates. Your creditors may agree to freeze your charges or interest rates during the negotiation process. This may result in decreased monthly payments.
DMPs make it easier to manage debt for some individuals. A successfully negotiated DMP reduces the amount of money a borrower pays to their creditors every month after taking into account their living expenses and bills.
Less Detrimental to Your Credit Score
DMPs may be informal but they will definitely affect your credit file for time to come. When you set up a DMP, the fact that you’re paying lesser towards your debts each month than you agreed initially will be recorded on your credit file.
But in the long run, it may even be good for your credit score. A DMP also indicates that you were willing to take charge of your financial problems without resorting to a formal insolvency solution like bankruptcy.
Formal and legally-backed insolvency options have their limitations. People who declare bankruptcy have their details entered in the public register. They may not be able to avail specific employment opportunities or lose some of their valuable possessions.
Unlike bankruptcy, debt management plans are not considered formal solutions and not entered in the public register They are not legally sanctioned so you won’t risk losing your valuables or job prospects.
Cons of DMP
Only after you understand the disadvantages of debt management plans can you decide whether a DMP will work best in your situation:
DMPs May Cost More Than Other Debt Solutions
Debt management plans are just one of the options available to borrowers struggling with debt issues. They do not work out well for everyone. In fact, for some borrowers, DMPs may be the more expensive solution. That happens because debt management plans are designed to get debtors to pay the amount they owe in full.
When you enter a DMP, you will be expected to repay your debt in full over a fixed term. You repay what you owe. With other debt solutions, like individually voluntary arrangements (IVA), you can get up to 90% of your debt written off. Also, to set up a DMP, you need to hire a debt management service and that will only add to your expenses. Because of these reasons, DMPs are considered the more expensive debt solution in the long run.
Creditors Could Reject Your DMP Proposal
All your creditors have to agree with your DMP proposal for it to come into effect – and that can be a problem for some borrowers. DMPs may not be the right option for you if any of your creditors disagree with the terms of your proposal or reject it.
The rules are different for other insolvency options like IVAs or Trust Deeds so they should be looked on as viable alternatives to DMPs. If a specific proportion of your creditors accept the terms of an IVA or a trust deeds, all your creditors are bound by it.
DMPs Are A Long-Term Solution
Debt management plans last longer compared to formal insolvency solutions like IVAs and Trust Deeds. While a DMP may extend for more than 10 years, most Trust Deeds and IVAs last for 5 and 6 years respectively.
Not A Formal Solution
We’ve already mentioned earlier that debt management plans are not a formal or legally-backed debt management solution. While that may work in favour of some borrowers, it can have disastrous consequences for others.
Since DMPs are not formal, you can expect your creditors to cease correspondence with you but you cannot be sure they would since they are not legally obliged to sever contact with you, as they would be in formal plans like IVAs or Trust Deeds. Though it happens rarely, your creditors can also opt out of the plan at any given time.
Your Creditors May Not Freeze Your Interest
Your debt management agency will try its best to get your charges and interest frozen but they cannot guarantee that. Your credits may refuse since they are under no legal obligation to deduct your charges or freeze your interest.
No Legal Protection
Since a DMP is not a legal solution, it offers flimsy protection against court action. Even with a DMP in place, your creditors can go to the court to obtain a County Court Judgement (CCJ) against you.
Get Debt Help from Money Advisor
A debt management plan is only one of the debt solutions available to individuals with money problems. Other formal solutions like IVA may work out better than DMPs for some people due to their inexpensive nature and shorter term.
If you’re wondering whether a DMP will work best for you, get in touch with our money experts. They will hear you out and help you decide which debt solution works best for you. Get debt help!