Debt management plan

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A Debt Management Plan (DMP) is a method used in various countries for paying personal unsecured debts. Typically, such debts are out of control -- even minimal payments are late and take too large a portion of income, or even exceed it. A DMP usually involves a third party organization that aggregates all or some of the debts, assessing income and budget, and re-negotiating interest rates and payments with the lenders. The negotiated rates and payment plan is based upon the probability of a higher likelihood of collection by the lenders in light of the debtor's more realistic monthly repayment.

How Does A DMP Work?

DMPs are typically a managed arrangement with creditors through a third party. The debtor may use a free creditor-sponsored DMP organisation or a fee-charging DMP company. Accepting any terms of a DMP proposal put forward on behalf of the debtor is always at the discretion of the creditors. A good debt advice service recognises this and will only suggest a debtor pays what they can realistically afford after their priority expenses are met. Priority expenses usually include mortgage or rent, food and utilities. Creditors usually request a review of the debtor's situation annually to ensure they are paying as much as they can reasonably afford.

Fee-Chargers

Fee-charging DMP companies will often charge up-front fees as an 'admin' charge, and then will charge a percentage of the surplus that is paid to the creditor as a fee to the debtor. The larger the payment the debtor is encouraged to make, the larger the fee the fee-charging DMP company receives. Also, there is the possibility that a fee-charging DMP company will enter a debtor into this kind of arrangement when it is not in the debtors interest and bankruptcy might be a better alternative, especially if the debtor has large debts and it would take them many years to pay their debts back this way.

The fees charged by DMP companies are usually a percentage of the monthly amount paid, money that could theoretically be going to clear the debt itself if no fees were charged to the debtor. However fee-charging companies usually offer enhanced support and administration services to the debtor throughout the programme. It is also common for fee-charging companies to employ dedicated "creditor liaison" departments who can negotiate with creditors directly in terms of stopping interest and other charges being added to the debts in question.

First Finance Services[1] are an examaple of a fee charging debt management company.

What Kind Of Debts In A DMP?

People that use a DMP to eliminate their debt will typically only have unsecured debts such as personal loans, credit cards, bank overdrafts and store cards included in their plan. Secured debts or priority costs, like mortgages, car HP repayments, rent and utilities, are not subject to monthly payment reductions.

Credit Ratings

When someone participates in a DMP the likelihood that their credit rating will be damaged already is very high. It is not the DMP that affects the credit rating directly, but the inability of the debtor to meet their contractual payments that will be recorded on their credit file - usually in the form of a default notice. Any Court action taken by the creditor is also recorded on credit files.