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.
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.
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 Individual Voluntary Arrangement.
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.