Overview of DMPs

What debts go into a DMP

Most non-priority debts can go into a DMP. This includes credit cards, catalogues, BNPL, overdrafts and unsecured loans. Also most debts that have been sold to a debt collector.

Secured debts – mortgage, car finance – can’t go into a DMP and need to be paid in full.

Other priority debts such as rent arrears, energy bills and council tax arrears, can’t go into a DMP. You need to get payment arrangements for these in place first. Then you can pay the rest of your debts through a DMP.

The DMP will only get low payments at the start but these can increase when you have  repaid some of the priority debts or the car finance.

 

How much will you pay each month?

This is a key question. Pay too much and you won’t be able to keep up the payments. Pay too little and your DMP may never end.

DMPs don’t tie you into a long-term formal contract. As your life changes, you can pay more or less.

The best way to find how much you would pay to a DMP is to contact StepChange. Be very realistic about your expenses and say Yes when they ask if you would like to save a small amount each month. Many people don’t even need to talk on the phone, as one person said:

I was imagining having lots of difficult conversations trying to justify my expenditure and explain my debts etc but it was actually the complete opposite. All I did was spend an hour or putting a budget together on the Stepchange website, then send off the forms and I was done. I’m now two months down the line and I’ve already paid off more than I had in the previous two years.

StepChange are not pushy. The choice is yours if you want them to set up a DMP.  But knowing the amount you would pay a month is important – without it you can’t tell how much difference a DMP will make to your life or how long the DMP will last.

 

How long will your DMP last?

Here is a calculator that lets you put in how much you will pay at the start, make a guess at what this may change to later and see how that affects how long your DMP will be.

Your DMP could end up being longer, if things don’t go well, or shorter if your finances improve. Which is more likely?

DMPs can also be speeded up, see below.

 

Low payment DMPs

DMPs are a great option if you expect your situation to improve. Some examples:

• it may take a few months to get a new job after redundancy;

• you are currently on maternity leave;

• the car finance will finish in a few months;

•  you have priority debts such as council tax arrears or rent arrears. Here you make large payments to the priority debts and only small ones to your credit cards and loans. When the priority debts are gone, you can pay more to the other ones.

• you want to make affordabilty complaints.

In these situations, it doesn’t matter how low the DMP payments are at the start.  They can even be just £1 a month – this is called a token payment Debt Management Plan. Because your DMP payments will get larger, the time to complete the DMP will reduce a lot.

 

Do you have a better alternative?

 

Common worries

You may have lots of concerns about starting debt management, including whether interest will be frozen, if you will get lots of calls from creditors, your credit record and how it will affect your partner.

Read The main worries people have about debt management for a detailed look at all of these. Many of them aren’t problems for most people!

 

Check out the other debt solutions

If your DMP sounds too long then one of the other debt solutions may be better, so look at these comparisons:

• Long DMP or bankruptcy

• DMP or an IVA (it’s best to avoid an IVA unless you have a house with equity or a car worth over £4,000)

• a Debt Relief Order  (a DRO could be your best option if you are renting and your debts are less than £30,000 – this is going up to £50,000 in June 2024).

You don’t have to rush into a decision, but if your debts are getting larger every month, then don’t delay – or you will just have a bigger problem to solve.

 

How to set up a DMP

(and some variations)

Use a DMP firm

If you use a company to set up your DMP, this works as follows:

• you phone the firm and they talk through your debts and your income and expenditure. Be realistic about your expenses;

• you agree on a monthly payment with the firm;

• you stop paying your debts and set up a monthly payment for this amount to the firm;

• the firm writes to your creditors and every month divides up your monthly payment between them

• there is an annual review to see if your payments should change, but you can ask for changes earlier if you want.

Basically you make one payment per month to the firm and the firm handles everything else. 

 

Choosing a DMP firm

There are three major providers of free DMPs in Britain: StepChange, Payplan and CAP. If you go to one of these, all your monthly payment goes to pay off your debts.

Never use a DMP firm that charges a fee. These commercial debt management firms do exactly the same as free firms – except their fees mean less goes to your debts so the DMP goes on for longer. Fee-charging DMPs are no better than free DMPs.

See Choosing a Debt Management company for more details.

 

Payment arrangements – like a DMP that you run yourself

If you only have one or two creditors, just phone or write to them to reach an agreement about lower monthly payments and freezing interest. This is often called making payment arrangments.

When you have more creditors, read Running your own DMP which explains how the free CABmoney facility can help with this by doing the calculations and generating the letters.

The advantages of doing this yourself and not using a DMP firm are:

• you may feel you are more in control;

• you don’t have to explain your finances to a DMP firm.

The disadvantages are:

• you have to talk to your creditors at the start and when anything changes;

• some creditors only set up arrangements for 6 months, so you have to keep doing this;

• you have more payments to make each month;

• it has the same effect on your credit score as a DMP.

 

What happens during a DMP?

In the first year

Before it starts, you should cancel the payments to your creditors.

You may continue to get letters and calls for a month or two at the start. These do stop! Keep telling them you are in a DMP and don’t agree to pay them any more money.

This is what one reader said about his StepChange DMP:

It’s taken a bit of getting used to but it it has made things much easier to manage as the debt payment is now more like a mortgage payment. It gets taken as soon as I’m paid and then I can easily budget what’s left, rather than the daily juggling between cards that I had before.

If you get a letter saying your debt has been sold to a debt collector, this doesn’t change your DMP at all. Tell your DMP firm and they will switch to paying the new debt collector instead.

After a few months, check to see if all your creditors have frozen interest. Most do! Many people will find all their creditors have. But if you have one or two creditors that haven’t, read What to do if a creditor doesn’t freeze interest. You can complain – leave a comment below if this is a problem.

Your DMP should be reviewed at least once a year, see Having an annual DMP review for details.

 

Credit ratings

If you are thinking of a DMP or are in the early stages, readHow a DMP affects your credit rating.

When you are close to the end or have already finished your DMP, read this, which has ways to speed up the clean-up process: My DMP is ending – will my credit score improve?

 

Mortgages

If you are worried about a mortgage:

• Can you get a mortgage in a DMP?

• Most people in a DMP can get a new fix from their current lender, see Can I get a new mortgage fix with poor credit?

 

If things aren’t going well

If you are struggling, talk to your DMP firm, don’t wait for your annual review.

Debt management is flexible so if things don’t go well you have options, including changing your payments or stopping the DMP and choosing a different debt solution:

• Can your DMP monthly payment be reduced if you are struggling?

• also look at other options such as a Debt Relief Order. Your DMP firm will be able to tell you if you should think about switching to a different debt solution.

Don’t borrow more money to try to get by – on a DMP you will find it very difficult to be able to repay new debts.

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Speeding up your DMP

A DMP may sound long at the start but there are various ways to speed it up:

• • affordabilty claims in a DMP -you can make these claims in a DMP. They are a very good idea – if you win an affordability complaint, your DMP will finish sooner. Many people starting a DMP should look at affordability complaints about the debts in the DMP and any others that have been settled in the last few years.

  • Full and Final Settlements – when a DMP has been running for a while and some debts have been sold to debt collectors, they may take a lower settlement offer.

  • your pension and your DMP – your pension doesn’t have to be used to pay your debts. I am not recommending this, but it is an extra option.

  • What happens if you inherit money? The good news is that you can choose what to do with the money. Making settlement offers is a good idea!

  • if your DMP has been going for years, has a lot longer to go and your debts have been sold to a debt collector, read When to ask for a CCA agreement? and think if that may help. The older your debts are the more likely it is to work.

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Published On Debt Camel And Reproduced.