Debt can come at you hard and fast and take forever to pay off.
Of course, there are ways to manage it. There are charities and organisations dedicated to help those struggling to find a way to make repayments.
While some are free of charge, others may come with a fee.
One way to deal with it may be through a debt management plan (DMP). A DMP allows you to manage your debts and pay them off at a more affordable rate.
It’s done via a debt management company that has to be authorised by the Financial Conduct Authority (FCA).
You need to declare your financial situation to the managing company and they work on a monthly payment you can afford.
The company then contacts your creditors and asks them to agree to the plan, though they don’t have to do. If the creditors reject the plan, you’ll have to continue paying them back separately.
So every month, you’ll make the payment to the company and they then share the money out between your creditors.
This method might be ideal for those in non-priority debts – where debts will not cause you to lose your home – such as credit cards, overdrafts or personal loan debts.
If you fail to make the DMP payments, you may get a have a court order – a County Court Judge (CCJ) served against you.
Pros and cons of a DMP
Pros:
- Can set it up for free
- You only pay what you can afford
- Don’t need to deal directly with creditors
- DMPs are reviewed to make sure you’re paying what you can afford
- Most creditors reduce interest rates and eliminate late fees
- All debts are managed by the same DMP
Cons:
- Some creditors may still contact you
- You can’t take on any new debt while under a DMP
- Can’t miss payments (otherwise risk CJJ)
Andy Shaw, the debt advice coordinator at the StepChange Debt Charity explained to Metro.co.uk the nature of a DMP in more detail.
‘A debt management plan is one of a range of debt solutions that can be provided to people in problem debt.
‘A DMP allows you to manage your debts and pay them off at a more affordable rate. This is done by making reduced monthly payments.
‘These payments will be based on whatever disposable income you have after your monthly budget. You can set up a DMP by yourself, although many people find it easier to go through a professional debt adviser.’
DMPs from StepChange Debt Charity are without a fee, although this is not necessarily the case with other providers who may charge for the administration of the plan.
If you are in financial difficulty, you may prefer a fee-free DMP provider as any money saved on fees can then be put towards debts.
But you should really consider whether a DMP is for you, adds Andy.
He says: ‘Debt Management Plans are not for everyone – particularly if it would take you a long time to repay your debts or, even after budgeting, your outgoings are still higher than your income.
‘In these cases, it is important to see if other solutions, such as insolvency, would serve you better. Your advice provider should be able to help you with this or refer you to someone who can.’
One woman who has set up two DMPs at different times says paying the latter off was no easy feat.
In 2000, 55-year-old bookkeeper Nikki Robinson was left in a debt to the tune of £45,000 which arose after a troubled marriage. After nearly a decade, she was able to pay that off.
Then after a horrible road accident, Nikki from Kent found herself in financial trouble again so she acquired another DMP, this time paying for it.
Her first DMP didn’t charge but the second incurred an administration fee which was offset by her bookkeeping services for the company.
She explains to Metro.co.uk: ‘I was an emotional wreck, I suffered from PTSD but was never diagnosed.
‘I was struggling financially and so as a freelance bookkeeper, I was able to get one of my clients who was registered to set up a Debt Management Plan for me, to deal with my debts which was now about £27k.
‘I paid a minimum of £100pm but I was suffering from issues after the car accident and as I was self-employed I worked until I got better. I always seemed to be tired.
‘My credit was very poor and at the time I had to use same day loans and twice I took out a secured loan against the flat.’
Nikki has now sold her flat and is saving money by living frugally. She is now renting and is working to improve her credit score.
She added: ‘I look for bargains, I have a network travel card, I collect points from my favourite stores and last but not least I occasionally get a free Nando’s meal.’
Each DMP looks different for each individual. StepChange Debt Charity has a rough template of what one DMP might look like.
If you don’t want to do it through a third party, you can always set up a DMP by yourself.
Consult with a financial advisor before deciding what is best for you.
Debt Month
This article is part of a month-long focus in November all about debt.
Scary word, we know, but we're hoping if we tackle this head on we'll be able to reduce the shame around money struggles and help everyone improve their understanding of their finances.
Throughout November we'll be publishing first-person accounts of debt, features, advice, and explainers. You can read everything from the month on the Debt Month tag.
If you have a story to share, a topic you want us to cover, or a question that needs answering, get in touch at MetroLifestyleTeam@Metro.co.uk.
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source https://metro.co.uk/2019/11/13/what-is-a-debt-management-plan-and-what-are-the-benefits-of-it-11084285/
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