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
A debt management plan (DMP) makes it easier to manage your secured debts as you'll likely get a more affordable monthly payment. You can avoid collection calls, save a bundle in interest and get out of debt sooner if the credit counselor successfully negotiates a DMP with your creditors.
What 4 things should you know about managing your debt? ›
In order to manage your debt more effectively, you may want to consider these seven steps.
- Take account of your accounts. ...
- Check your credit report. ...
- Look for opportunities to consolidate. ...
- Be honest about your spending. ...
- Determine how much you have to pay. ...
- Figure out how much extra you can budget.
Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees. If over $600 is settled, the IRS will view this debt as a taxable income.
Are debt management plans legit? ›
Some debt management companies are legitimate nonprofit credit counseling agencies, but many aren't. Common debt management scams and abuses by scammer credit counseling agencies include: failing to pay creditors on time under the terms of the plan. not paying creditors at all and keeping the deposits you make.
What is the criteria for a debt management plan? ›
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.
What are the 5 C's of debt? ›
This review process is based on a review of five key factors that predict the probability of a borrower defaulting on his debt. Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral.
What is the 20 10 rule tell you about debt? ›
The 20/10 rule follows the logic that no more than 20% of your annual net income should be spent on consumer debt and no more than 10% of your monthly net income should be used to pay debt repayments.
Can you keep a credit card on a debt management plan? ›
Most credit card issuers will require that an account entering a debt management plan be closed. It may be in your best interest to reach out to creditors first and request that your accounts be closed. You may be allowed to keep a card for emergencies or business, though; ask before you sign up.
Can you pay off a debt management plan early? ›
Debt management plans (DMP) are flexible. This means you may be able to pay off a DMP early. You can do this by increasing monthly payments or paying a lump sum.
How long does a DMP stay on a 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.
There is a high probability that you will be affected for a couple of months or even years after settling your debts. However, a debt settlement does not mean that your life needs to stop. You can begin rebuilding your credit score little by little. Your credit score will usually take between 6-24 months to improve.
Who has the best debt relief program? ›
Best debt relief companies
- Best for debt support: Accredited Debt Relief.
- Best for customer satisfaction: Americor.
- Best for large debts: National Debt Relief.
- Best for credit card debt: Freedom Debt Relief.
- Best for affordability: New Era Debt Solutions.
- Best longstanding company: Pacific Debt Relief.
If you're one of the millions of Americans struggling to repay high-interest debt, a debt relief plan may be an option to help you get your finances on track. But it's not a quick fix. It's a long-term solution designed to help you get out of debt over a period of time — typically several years.
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.
What is a disadvantage of a debt management plan? ›
The cons of Debt Management Plans
Creditors require the accounts to be closed in order to be put on a DMP. This can slightly lower your credit score, because closing multiple accounts at the same time affects the length of your credit history.
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%.
What debts cannot be included in a DMP? ›
Debts that cannot be included in a debt management plan (DMP) are those that are considered 'priority debts' such as mortgages and secured loans, student loans, court fines, and child support payments.
How much does a DMP cost? ›
The fees charged by for-profit DMP providers vary. They are typically around 17% of your monthly payment. Before you start a DMP with a company that charges you, make sure you: Find out what you are paying for.
Which debts can t you pay off with a debt management plan? ›
DMPs don't include priority debts. These are debts that have been secured against your home and other assets, as well as utility bills or Council Tax. You'll need to prioritise payments to these in your budget. These must be paid in accordance with the original agreement.
What are the 4 C's of credit for debt instruments? ›
The “4 Cs” of credit—capacity, collateral, covenants, and character—provide a useful framework for evaluating credit risk.
- Basic steps to help you deal with a debt. ...
- Step one - make a list of everything you owe. ...
- Step two - put your debts in order of importance. ...
- Step three - work out a personal budget. ...
- Step four - get independent advice. ...
- Step five - talk to your creditors. ...
- More useful links.
Then, start making a plan with these 14 easy ways to pay off debt:
- Create a budget.
- Pay off the most expensive debt first.
- Pay off the smallest debt first.
- Pay more than the minimum balance.
- Take advantage of balance transfers.
- Stop your credit card spending.
- Use a debt repayment app.
But the best practice is always to pay off debt as quickly as possible. If you use a credit card, try to pay off purchases right away, without carrying your balance for an extended period. Even when you have more available credit, you can keep your options open by building an emergency cash fund.
