Debt Management Plan
What is it?
A debt management plan (“DMP”) is an informal procedure under which a third party will seek to broker an agreement between a person owing money (“a debtor”) and the individual’s creditors. It offers no form of legal protection from creditors.
Who is it for?
- For individuals who have experienced a temporary drop in income and are unable to meet their ongoing financial obligations in full, but expect to be able to do so again in due course.
- For individuals who cannot currently meet their financial obligations in full but who expect a windfall in the foreseeable future which will enable them to do so.
- For individuals who cannot meet their current obligations in full from their current income, but are able to do so over a longer timescale.
The Debt Management Process
Under the agreement, the debtor will be asked to make an affordable monthly payment into the debt management plan out of any surplus income, after living expenses. After the payment of any fees payable to the provider of the debt management plan, a proportion of this monthly payment will be offered to each of the creditors, the actual amount being dependent on the relative size of each creditor’s debt.
In considering a debt management plan, it should be noted that whilst creditors may be prepared to accept a reduced monthly payment, they might not be prepared to stop any interest accruing on the outstanding amount or waive other account charges. This is very important as, typically, you will be required to pay your creditors in full under a debt management plan, albeit over an extended period of time.
The ability of a third party to implement a successful debt management plan on favourable terms is therefore dependent on a combination of your own personal circumstances, the attitude of your creditors.
- Interest and charges may be stopped.
- Not a formal insolvency process.
- Creditors cannot be compelled to accept a debt management plan, as this is an informal arrangement, and they may initiate or continue with any legal action against you.This may include obtaining a county court judgement, followed by a charging order on your domestic property, which can ultimately be converted into an order to sale. Alternatively a bailiff could be instructed to cease goods from your home in satisfaction of the debt.
- The repayment period is unlimited and can extend for many years.
- Creditors may not stop interest and charges and expect to be paid in full.
What is an informal arrangement?
Where an individual has a small number of creditors and there is no immediate threat of legal action, it may be possible to agree an informal arrangement direct with their creditors. This personal financial arrangement could be of particular interest to individuals who do not wish a third party to be involved in their financial affairs on an ongoing basis.
Who is it for?
An informal arrangement will benefit people who have a small number of creditors and are in need of some breathing space before paying. This is on the basis of no immediate threat of legal action.
Chamberlain & Co can provide guidance on the steps you need to take if you wish to negotiate directly with your creditors.
It should, however, be stressed that such personal financial arrangements are not legally binding and the creditors concerned cannot be forced to accept them. They may, therefore, continue with any legal action against you.
If you are not concerned about the involvement of a third party, you may wish to consider agreeing a Debt Management Plan, as a means of dealing with your debt.
- The professional costs associated with an informal arrangement are not usually as great as those of a IVA.
- You remain in control of your assets.
- It may be possible to obtain your creditors’ agreement to freeze any ongoing interest charges.
Disadvantages of informal arrangements
- Your creditors are not obliged to freeze the interest on your account; they may only do so for a limited period of time or only be prepared to charge interest at a reduced rate.
- You will have to ensure that your creditors are treated equally. You will need to calculate how much you can afford to pay in total each month and divide this proportionately between creditors.
- It is likely that you will be required to repay your creditors in full over a number of years. It is possible therefore that you will continue to pay for some considerable period after a IVA would have finished.
- You will remain responsible for ensuring that a monthly payment is sent to each of your creditors for the correct amount.
- You will have no court protection and your creditors can, at any time, decide to issue a bankruptcy petition, obtain judgement or other legal process in respect of their debt.