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Debt Management Plans Explained

Basically, a Debt Management Plan (DMP) is an informal agreement between a debtor and his/her creditor(s) for paying back non-priority debts, often at a reduced, and therefore more affordable, rate. The debt is paid back by one set monthly payment which is then divided between any creditors. The DMP can often be managed by a DMP provider who will deal with the creditors on behalf of the debtor.

Non-priority debts include debts such as credit cards, store cards and loans. A DMP is not legally binding which means that the debtor will not be tied in for a minimum period and can cancel the DMP at any time. Priority debts are those debts that can lead to serious consequences if not paid and include payments such as:

· Mortgage or rent arrears

· Council tax or rates arrears

· Gas and electricity arrears

· Magistrates’ Court fines

· Arrears of maintenance payable to an ex-partner or children

· Income tax or VAT arrears

· TV licence or TV licence arrears

All of these priority debts need to be included in a DMP when setting the payment terms.

A DMP can be the preferred option if you’d like somebody to deal with your creditors for you and you can afford the monthly repayments on your priority debts and your living costs but you find yourself struggling to keep up with non-priority debts. Before entering into a DMP you need to understand the effects it may have, such as:

· It will probably take longer to clear your debts because you will be paying less each month

· Using a DMP provider may mean paying a fee

· Your creditors may not be willing to co-operate or may continue to contact you regarding your debt

· You creditors will not necessarily freeze the interest and charges on your debts so you may find that the amount you owe goes down by less than you expect

· The DMP will be shown on your credit record which will make it more difficult to obtain credit in the future.

If you decide that a DMP is the best way for you to clear your debts, there are some issues that you’ll need to consider before you begin:

· List your priority debts to ensure that these are affordable for you

· Work out a budget that means you have enough available income to cover the monthly payments on the DMP

· Choose a DMP provider

· Check the contract carefully before you enter into it to ensure that you are able to afford all payments and still have enough to pay your priority debts and cover your living costs

When it comes to finding a DMP provider, commercial providers usually cover their costs by charging a fee for this service. There are free DMP providers, these are usually charities and are paid directly by the banks and credit card companies which means they don’t pass on their fees to their customers. If you own a business that’s in debt, then using the services of a professional DMP that charges will probably be the best option for you in clearing your debts whilst keeping your business solvent.