Here's what you need to know about Debt Management Plans (DMPs).
What is a DMP?
A DMP is an informal agreement between you and your creditors for paying back your non-priority debts, and is not legally binding, meaning you're not tied in for a minimum period and can cancel it at any time.
- Non-priority debts are things like credit cards, loans and store cards
- You pay back the debt by one set monthly payment, which is divided between your creditors
A DMP may be a good option if the following apply to you:
- If you can afford the monthly repayments on your priority debts and your living costs, but are 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 with your budgeting
What impact can a DMP have?
However, you need to be sure that you understand the impact that 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
- Make sure you choose a free DMP services adviser from a free Advice agency, such as the Citizen Advice Bureau, Step Change or Pay Plan
- 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
How do I set one up?
If you’ve decided a DMP is right for you, you’ll need to follow these steps to set one up.
Sort out your priority debts
A DMP will only cover your non-priority debts, such as credit cards, store cards and loans. Before you decide to get a DMP, you should make sure you can afford to pay your priority debts, which include things like your mortgage, rent and council tax.
If you're struggling to afford your priority debts, you may need to think about choosing another debt solution that's more appropriate for your situation.
A DMP provider will normally help you work out your budget, but it's a good idea to do this yourself first. This will mean you've got a good idea of how much money you’d have left over each month to pay into the DMP.
Be honest and make the amounts realistic!
Under your expenses, we recommend that you include the following:
- Housekeeping - include realistic amounts for what you spend on food, toiletries, school dinners and meals at work, cleaning materials, cigarettes, sweets, children's pocket money and pet food
- Housing Costs - this should include mortgage or rent, a second mortgage or secured loan, buildings and contents insurance, service charges and life or endowment insurance cover attached to your mortgage
- Council Tax
- Gas, Electricity & Water Charges
- Travel Expenses - include both public transport and the cost of running a car such as road tax, insurance, and maintenance
- Childcare Costs
- TVs - include your TV licence, TV rental costs and telephone charges
- Other Expenses - such as medical and dental expenses or support for an elderly relative and your clothing and footwear
You should set money aside for unexpected events and contingencies. This includes saving for things like the replacement of essential household goods when they break down.
Be mindful of how much you're spending on things
If you can make cutbacks, this will make more money available for you to pay back your debts. You will use your budget later on to show the people you owe money to what you can afford to pay towards your debts.
If a creditor thinks the amount you spend on something is unreasonable, they may question it and ask you to explain why you spend this amount. If you're sure the amount you spend on something is reasonable, it's a good idea to include a short explanation in a covering letter to your creditors.
You can also try and cut back on certain expenses, such as:
- Telephone Costs - you can include an amount for a home phone and a mobile but if everyone in the household has a mobile it can soon add up. Think about whether you need them all and ways to reduce the bills.
- Travel Costs - creditors are likely to object to two cars in your household unless you have a good reason. This could be because someone in your household has mobility needs due to disability it’s the only way that two working adults can get to their jobs.
- Other Costs - if a creditor does question your spending, take another look and see if it’s something you can reduce. Don’t just change it, otherwise you may not be able to keep to your budget. Ask yourself what would happen if you went without the item or cut it back. If necessary, ask the creditor to reconsider their position.
For more information about how to cut back on your spending and save money, take a look at Citizens Advice .
What to do next
Once you've listed all your income and expenditure, add up the figures and see if you've got any money to spare to pay back your creditors. If you've got money to spare, you'll need to work out how you're going to pay off your debts.
If you don't have any spare money to pay off your debts, you'll have very limited options for dealing with your debt problem. You'll need to think about these very carefully.
You can find more information on Citizens Advice about dealing with your debts, including your options if you don't have enough money to pay off all your debts. If you are also struggling to pay creditors because you have no income or money, Citizens Advice offer sample letters to send to creditors.
What you should say to your priority creditors
Most creditors will consider a reasonable request or offer of repayment that you make. It will depend on your financial circumstances, including:
- Spare Money - how much money you've got spare to pay your priority creditors
- Priority Debts - how many priority debts you have
- Your Situation - whether or not your situation is likely to get better
What you should give to your priority creditors
Make sure you give them a copy of your budget sheet and explain your situation fully. If your problem is short term, you might not be able to pay off anything towards your debts at the moment because you've lost your job, or are off work sick.
If you're offering to pay back extra at regular intervals
You might want to ask your creditors if you can pay back an extra amount at regular intervals until the debt is cleared. You need to be clear about what you are asking for. Tell your creditors whether the repayments will be on a weekly or monthly basis.
You also need to be sure that you can afford the amount you are offering to pay. To work out how much you can afford, you will need to look at your budget. Don't forget to mention any changes that you know are going to happen which will affect your ability to pay or the amount you are offering.
What the creditor might ask you
Whether the creditor agrees depends upon:
- Income - whether the client has disposable income
- Assets - whether the client has assets
- Personal Circumstances - whether the client is affected by personal circumstances
The following table shows the most common proposals which may be made direct to creditors and when each one might be used.
Securing the debt against an asset, usually the home
- The client has large debts and no other way to pay them off
- The client needs to avoid a creditor making her/him bankrupt, to save the home
What It Involves
Regular repayments to clear the debts in full, usually on a pro rata basis
Small regular payments (not pro rata), for example, £1 per month to each creditor
The creditor taking no further action to pursue the debt
Repayment of part of the debt by instalments and the creditor writing off the rest
Paying a Lump Sum
Paying a lump sum off the debt by instalments and the creditor writing off the rest
Suspension of Payments
No payments for a fixed period
Struggling to pay your DMP?
You may find you're struggling to make the payments on your debt management plan (DMP). If this happens to you, it's important you take action straight away - if you bury your head in the sand, you could make the problem worse.
Top tip - if you're in a DMP, it's normally not a good idea to take on any more debt, such as an overdraft or credit card.
If you feel that you need to take on more debt, for example, if you've had some unexpected costs such as urgent repairs to your home, talk to your DMP provider first. They may be able to re-negotiate your DMP payments which would leave you with more money to pay for your other costs.
Why are you struggling to pay?
There are a number of reasons why you might find you're struggling to make the payments on your DMP. Here are a few reasons:
- A change in your circumstances, such as losing your job or long-term sickness
- Your debts with your priority creditors, such as mortgage or rent, have increased, leaving you with less money for non-priority debts
- You've taken on other debts since starting your DMP
- You've had some unexpected costs, such as urgent repairs to your home
Whatever the reason, if you're struggling to make your payments or think you're going to struggle, you need to contact your DMP provider immediately.
Have you missed a payment?
If you've already missed a payment, you need to contact your DMP provider immediately. Missing a payment will mean your creditors don't get the monthly payment they're expecting, which may mean they decide to stop co-operating with your DMP.
Don't bury your head in the sand, as this will only make the problem worse. Talking to your provider quickly is the only way to get the problem sorted out. They may be able to negotiate with your creditors to keep the DMP going.
Can you reduce the payments?
The amount you pay into a DMP doesn't have to be set in stone. If you're struggling to make the payments each month, ask your provider to reduce the monthly payments. Bear in mind that if your payments are reduced, your debt may take even longer to pay off.
Why are creditors still contacting you?
There are a number of reasons why creditors might still contact you if you're in a DMP.
To send you regular account statements under the rules in the Consumer Credit Act 1974, your creditors will normally have to keep sending you annual statements as well as arrears and default notices in a set format. This happens even when you're in a DMP. Don't worry, as it doesn't mean there is a problem with your DMP. However, if you receive other letters demanding payment or threatening court action, you'll need to contact your DMP provider for advice.
You haven't had your DMP for very long
Some creditors may chase you for payment if you haven't yet made many payments on your DMP. You should tell your creditors that you're paying into the DMP that they've agreed to and ask if they'll stop sending you reminders.
They're chasing you for debts not in your DMP
Remember that a DMP won't pay off all your debts. Your priority debts, such as mortgage arrears or court fines, can't go into a DMP. You need to make arrangements to pay these debts first and still need to deal with these creditors yourself.
The creditor has refused to deal with the DMP provider
Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.
If the creditor doesn't want to deal with the DMP provider, they can still take action to recover the money you owe, which may include taking you to court. If this applies to you, ask the creditor why they're not willing to co-operate with the DMP. You can try to negotiate with them yourself to see if they'll change their minds. However, they're not legally obliged to do so, so you may need to keep dealing with this creditor separately.
The creditor has made a mistake
The creditor may simply have made a mistake or not fully updated their records. If you think this is the case, ask the creditor why they're still contacting you, remind them that they've agreed to the DMP and ask them to update their records.
If you think the creditor shouldn't be contacting you
While there are many valid reasons for a creditor to contact you while you're in a DMP, if they've agreed to the DMP they should accept the fact that you're making payments through it and keep contact to a minimum.
The first step you should take is to contact your DMP provider to explain what's happening. They may be able to negotiate with the creditor to stop contacting you. If they're unable to do this, you can try contacting the creditor yourself, explaining that you're in a DMP and asking them to stop contacting you. If you believe the creditor is harassing you, you may need help to talk to them.
Can you cancel a DMP?
A DMP isn't a legally binding agreement. This means that you can cancel it if you want to. There are a number of reasons why you might want to cancel, including:
- You're not happy paying a fee each month which means there's less money left to pay your creditors
- The interest on your debts hasn't been frozen, so the problem is getting worse
- Your circumstances have changed for the worse and you're struggling to make the payments
- You've come in to some money, perhaps through an inheritance or payment protection insurance reclaim, and are in a position to pay off your debts more quickly
- You're not happy with your provider
Before you cancel
- Before you cancel your DMP you should think about how you're going to deal with your debts
afterwards. When you cancel, the provider will tell your creditors, so they might start charging you interest and late payment fees again, as well as expecting you to resume higher payments. You'll also have to deal with your creditors yourself again. Think about how you're going to cope with this.
If you entered the DMP agreement over the phone or on the internet, then it is classed as a distance salewhich gives you extra rights. You will have a cooling off period of 30 days. During this time, you can cancel your DMP for any reason and get a refund of any fees you've paid.
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.
Court action for debt
The creditor and the client should enter into negotiations to try to settle the matter without going to court. The creditor and debtor must follow the Practice Direction on pre-action conduct which sets out the steps a court will expect both parties to follow before taking court action. For example, the client should acknowledge the creditor's letter before action within 14 days, and provide a further detailed response, either making proposals for settlement or giving reasons why the claim is not accepted.
In a debt claim, where the claimant is a business, the debtor must give time to obtain debt advice. The court may penalise either party for failure to follow the Practice Direction on pre-action conduct procedure, for example, by reducing the final sum awarded or by making an award for costs. The client should therefore keep a careful record of her/his attempts to negotiate. If the creditor has failed to follow a reasonable procedure, for example, by taking court action without warning, the client should draw this to the attention of the court.
More about pre-action procedureA creditor who wants to start court action completes the same form (a 'claim form') whatever the value of the debt, and whether s/he wants to recover money, goods or property.A creditor with a money claim for a fixed or an unfixed amount or both, and where there are no special procedures under the Civil Procedure Rules, must issue the claim at the County Court Money Claims Centre (CCMCC). Information about the CCMCC is available on the Ministry of Justice website.
Some creditors with claims for fixed amounts of money less than £100,000 can issue them direct online at www.moneyclaim.gov.uk. Usually claims will be issued, printed and posted to the defendant on the day the claim is submitted. If the client defends the case, the court will allocate the case to a track and may at that stage transfer the case to whichever court it thinks is appropriate.
The rules about proceedings will be the same whether the case is dealt with in the county court or in the High Court. Claims of £10,000 or less will usually be allocated to the small claims track. Claims of over £10,000, up to and including £25,000, will usually be allocated to the fast track. Claims of over £25,000 will usually be allocated to the multi-track.