A Debt Management Plan (DMP) is an agreement made between yourself and your creditors to repay debts at a rate which is affordable to you. If you are struggling to meet your monthly debt repayments then a process of Debt Management can be used to negotiate a reduced rate of payment with your creditors.
The purpose of a debt management plan is to set a level of monthly payments based on what you can afford to pay. This payment is then distributed between your creditors (if you owe money to more than one organisation).
As part of a debt management plan, it is sometimes possible to get creditors to agree to freeze interest, however, this is something that has to be negotiated on a case by case basis.
There is no legal obligation on either party to agree or adhere to a debt management plan. Should a creditor refuse or back out of a DMP then they are free to persue you for the monies owed.
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Whether a creditor chooses to enter into a DMP is largely based on personal financial curcumstances. If the creditor believes you genuinely cannot afford to pay back the full amount they are often sympathetic. If on the other hand they believe you are capable of repaying the full amount then they will expect you to do so.
From a creditors point of view, debt management is preferable to insolvency (Bankruptcy) as they have a better chance of recovering money owed.
From a debtors point of view debt management usually preferable to insolvency, as insolvency places restrictions on future lending and the ability to run a business.
It is therefore in both the interstests of the creditor and the debtor (the individual oweing money) to reach an agreement where debts can be repaid on a manageable and realistic basis.
Negotiating a Debt Management Plan Yourself
There is nothing stopping you from trying to negotiate a debt management plan directly with your creditors yourself, but it is not easy as you will be:
- Trying to get agreement from several different companies
- Negotiating with professionals
The negotiation part is key and is really an area where someone with professional experience can make a difference.
Using a Debt Management Company
A debt management company will negotiate on your behalf with your creditors. The advantage of using a debt management company is that you get professional representation and an experienced negotiator working on your beahalf. A debt management company will be more familliar with how credit companies operate and may well be able to acheive more favorable terms for you within a debt management plan. This benefit has to be offset against the fact that a debt management company will charge you for their services. Payments are taken out of your montly payments at a rate of around 15%.
Summary of Debt Management Benefits
- Single monthly repayment (if you use a DM company)
- Negotiate a reduced level of repayment
- May be able to have interest frozen
- Not legally binding
- It can help avoid insolvency
- Once in a DMP you are unlikely to face further pressure or legal action from your creditors
