Process of a DMP

Debt Management Plans (DMPs) are for individuals who are struggling to repay all of their creditors each month. Unlike an Individual Voluntary Agreement (IVA), they are not legally binding, and by entering into a DMP, the debtor is agreeing to clear their debts in full by making affordable monthly repayments. As with an IVA, only unsecured debt may be included, such as credit cards and bank loans. While an individual could propose a DMP themselves, it is usual for an advisor to be involved, such as a provider that has had their code of conduct approved by the Office of Fair Trading (OFT).

Assess Finances

The first step to take in setting up a DMP is to review all income and outgoings on a weekly or monthly basis. A provider of DMPs will be able to assist with this. It is important to understand in detail how much of the monthly expenditure is debt repayment, as well as how much is on essential expenditure. Such a review will establish how much disposable income (income left over after basic living essentials and bills have been paid, such as rent or mortgage, utility bills and so on) is available. A DMP will only work if there is some money left over after these essential expenses. At this stage, the individual should record all debts owed, the total amount, and how much is currently being repaid to each.

DMP Proposal

After creating a detailed financial analysis, a proposal can then be put forward to the creditors. Depending on how much is owed to each creditor, will dictate how much of the monthly repayment amount goes to each. For example, where there are 2 creditors with outstanding debt of £2000 to one and £1000 to the other, a higher proportion of the repayment will go to the creditor owed the higher amount. It is usual for a letter to be sent to the creditors with an explanation of the individuals finances so they get a full picture of the issues. It is also worth advising that, if there has been a temporary financial set back (eg maternity or redundancy), once employment commences again and income increases, you may be able to increase the repayment. This will show willing and creditors often look favourably upon this. As a DMP is an informal arrangement, there is no obligation on the part of the creditors to agree to it. Furthermore, while some creditors may agree to freezing interest, they are under no legal obligation to do so, unlike an IVA.

DMP Company Fees

Should an individual submit a DMP proposal via a provider, it is worth noting that some are charitable and do not charge a fee (eg the Consumer Credit Counselling Service = CCCS), and some companies will charge for their services. This fee will be drawn from the monthly repayments made, however they will administer the plan for its duration, and ensure that the correct amount is paid to the creditors so the debtor is only required to make a single monthly repayment. Non fee charging providers also find they have a very high workload, and therefore cases are often backlogged and can take a long time to arrange. Any company that does charge for their services are required by law to be transparent about their costs. It is therefore worthwhile shopping around for the best deal.

Financial Freedom

Once a DMP has been agreed, the individual need only make the agreed repayments to their creditors, or where a DMP provider has been involved, a single monthly repayment. This continues until the debt is paid off, or the debtor ends the plan in order to change debt solutions.