Debt Management Plan (DMP)

What is a Debt Management Plan?

A DMP or Debt Management Plan is an informal agreement between a debtor and their creditors. It allows someone who is in financial difficulty to reduce the amount they pay to the creditors each month so that the payments fit within an affordable monthly budget.

Using this solution will enable you to start repaying your creditors without having to borrow more and constantly "Rob Peter to pay Paul". However, it is not a legally binding solution and has no fixed term. You have to pay back the full amount of your debt and so the repayment period can extend across many years

However, a DMP can be a useful temporary solution until business improves and normal repayments can be started again.

Who Should Use a Debt Management Plan?

A debt management plan can be used by anyone who is struggling with a debt problem. Because there is no agreement to write off debt, generally this solution is used where the total personal debt is less than £18,000 or for someone who is looking for a temporary breathing space from their creditors until business picks up.

Directors

A debt management plan is a private arrangement which is not publicised. As such it can be ideal for directors who do not want their name to appear on the insolvency register. A director can carry out a debt management plan without it affecting his or her position in a business or having to tell fellow directors.

Not all an individual's debts need to be included in a DMP. As such, this solution could be used to deal with some debts but not others.

Sole Traders

As with company directors, sole traders can continue to run their business while carrying out a debt management plan. However a debt management plan is not best suited to deal with debts with trade creditors or the Inland Revenue. As such, if you are a sole trader and have these debts, a debt management plan may not be the best solution for you.

A Temporary Solution

Creditors will often accept a Debt Management Plan when they realise that you are in financial difficulty. They are not obliged to write off any of your debt and may continue to add interest and late payment charges. However, you can start or stop the plan at any time and make changes to the payments if you need to.

For this reason, a debt management plan is often seen as a good option if you need a temporary solution to a personal debt problem. You can use the DMP until your business improves and you can go back to making your normal monthly repayments or you feel confident that you are able to sustain the payments necessary for a more formal solution such as an IVA.

Note: The suitability of a Debt Management Plan to resolve a debt problem caused by business failure will always depend on the individual's circumstances. Before deciding that a DMP is right for you, you must take professional advice.

Why not call Cooper Matthews today for an informal discussion?

Top

What debt can be included in a Debt Management Plan?

A debt management plan is best suited for debts with banks and finance companies rather than other commercial traders and suppliers. This is because banks are used to people suffering repayment problems and have the resources to agree to payment over extended time scales.

Very often, commercial creditors and crown debts such as the Inland Revenue and VAT will not agree to a debt management plan. Here is a list of the type of debts which would typically be included in a DMP:

• Bank Loans
• Overdrafts
• Credit Cards
• Store Cards

How Does a Debt Management Plan Work?

A debt management plan can normally be implemented within 2-4 weeks. The main steps required to achieve this are as follows:

Step 1: Assess Your Circumstances

An assessment of your financial circumstances should be carried out by an insolvency professional. This will generally involve reviewing the position of your personal income, expenditure, assets and debts. Depending on your circumstances, you will decide which debts you want to include within the DMP and whether you need to continue to pay any normally.

Step 2: Make offer of payment to creditors

The amount you can afford to pay your creditors (disposable income) is calculated based on your income and reasonable living expenditure. This is then offered to your creditors on a pro rata basis. I.e. if one creditor is owed 50% of your total debt, they will be offered a repayment each month of 50% of your disposable income.

Step 3: Start to make your payments as offered

Because a debt management plan is an informal agreement with your creditors, you do not have to wait for their formal acceptance of your offer before you start paying them. In fact, many creditors many not have responded to your offer by the time you want to make your first payment. You should start to make your payments as per your offer whether you have heard back from the creditor or not.

The Advantages of a Debt Management Plan

There are a number of advantages of using an IVA for company directors and sole traders:

• A DMP is not legally binding and so can be changed or even stopped to suit individual circumstances. As such, this solution can be used to give a temporary breathing space until business picks up once again.
• Monthly debt repayments are reduced to affordable amounts.
• Creditors start to be repaid within a budget you can afford without having to borrow more - robbing Peter to pay Paul stops.

The Disadvantages of a Debt Management Plan

• You will normally have to repay 100% of all your debt which may take many years. As such, a DMP is often used as a temporary solution. If business does not pick up, it may be sensible to consider another option.
• Your debt repayment period may be significantly increased as you are paying less off your debt each month.
• Default notices will be recorded on your credit file. This will mean that you will find it difficult to get further credit until your debts are repaid or settled in full.
• Creditors are not under any legal obligation to suspend interest or late payment charges.
• Debts such as Inland Revenue, VAT and trade creditors cannot normally be included in a DMP.

Top

What will a Debt Management Plan Cost?

If you use a Debt Management Company to implement a Debt Management Plan on your behalf, you will normally have to pay two types of charges:

• Instruction Fee

  Most Debt Management Companies will require you to pay an Instruction Fee. This is the fee charged for drafting the payment plan which will be offered to creditors and then undertaking the negotiation with them. The Instruction Fee will usually consist of the first and possible second payment that you pay into the plan. As such, you will not have to find any extra money to pay this fee.

• On Going Management Fee

  To pay for the management of the Debt Management Plan on your behalf, most debt management companies will charge a monthly management fee of 15% of your ongoing monthly payment. This charge covers the cost of making the individual payments to all of your creditors each month and the ongoing day to day management of the plan. This fee is taken from your standard monthly payment and therefore you will not need to find extra cash each month to pay it.

Top

Articles on Debt Management

Should you stick with a Debt Management Plan or change to IVA?  (19 Nov 09)

With Debt Management Plans often lasting for many years would debtors be better off considering an IVA or even bankruptcy?

Resolving directors personal debt problems with Debt Management  (28 Sep 09)

When a company gets into financial trouble there are a number of business rescue solutions available. The problem for directors is that corporate rescue solutions do nothing to resolve any debts taken on by them personally. One answer which should be considered is a Debt Management Plan.

Settling debt while in a debt management plan  (27 Aug 09)

If you are in a debt management plan and would like to make a settlement offer to your creditors, what gives you the best chance of sucess?

Top