The pros and cons of debt management plans

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What is a Debt Management Plan?

A Debt Management Plan, (“DMP”), is an informal insolvency procedure to address a debtor’s inability to maintain their regular payments to their creditors which is negotiated between a DMP provider and each of your creditors individually.

The informality might seem appealing when compared to the formal alternatives such as Bankruptcy or an Individual Voluntary Arrangement, (“IVA”), however, this informality does present the following disadvantages:

  • Interest continues to accrue on your debts unless each of your creditors voluntarily consents to a freeze on future interest;
  • Each creditor is free to choose both whether they will participate in the DMP and also what terms they will agree to;
  • Creditors are at liberty to pull out of the DMP at a later date should they so choose. Therefore a DMP offers the debtor limited certainty;
  • An informal procedure cannot incorporate any debt forgiveness. This means you will have to repay the entire balance regardless of how long it might take.

When is a DMP a good idea?

In our opinion, there are very few occasions when a DMP is the best available option.  Only if you satisfy all of the following criteria would we suggest you consider a DMP as an option:

  • If all of your creditors are financial institutions, (banks and credit cards)
  • If you genuinely believe that your financial difficulties will be very short lived and your income will rise very significantly inside the next 6-12 months
  • If own your own home or have another asset of significant value to protect
  • If your liabilities are not so large that repaying them in full remains a realistic prospect.

What are the down sides to a DMP when compared to bankruptcy or an IVA?

The biggest drawback to a DMP is that since it is an informal procedure, there is no debt forgiveness, ie no debt is formally written off.  At the end of an IVA or upon discharge from bankruptcy, you are no longer liable to pay any remaining shortfall to your creditors.

This is compounded by the fact that interest typically continues to accrue on DMP debts, often at a rate in excess of your monthly payments.  We have met people who have been in a DMP for over 5 years and owe even more after all that time than they did at day 1.  Had they entered into a formal insolvency procedure, the slate would have been wiped clean by that point.

Whilst the fees of a DMP provider are typically comparable to those for an IVA, the fact that you have to repay all creditors in full means that you personally bear these fees.  In an IVA or bankruptcy the nature of the debt forgiveness means that for all intents and purposes it is the creditors who pay the fees.

What about my credit rating?

Any insolvency procedure whether formal or informal will have a negative impact on your credit rating by the fact that you will breach the terms of the credit agreements.

How much will I need to pay each month?

You will be required to provide a schedule of your household income and expenditure at the start of any procedure whether a DMP, IVA or bankruptcy.  Your required monthly payments to creditors will be based on your surplus income after provision for your necessary regular outgoings.  The assessment of this surplus income tends to be similar for both DMPs and IVAs.  Ironically, bankruptcy tends to have the most generous guidelines for calculating how much you will have to pay each month, possibly because it is normally viewed as the debtor’s procedure of last resort.

In conclusion

DMPs do have their place, however, they should not be viewed as the “easy option” from the perspective of the debtor.  Indeed, the enthusiasm of the financial institutions for DMPs when compared to IVAs or Bankruptcy demonstrates the way the DMP terms tend to favour the bank rather than the debtor.

If you are experiencing financial difficulty you should seek professional advice from a Licenced Insolvency Practitioner before making your decision.  Phone Gibson Hewitt on 01932 336149 for guidance or to book a free initial meeting.