What is a Debt Management Plan?

What is a Debt Management Plan?

What is a Debt Management Plan?

A debt management plan (DMP) enables a borrower to reduce their debt expenditure by setting up a repayment arrangement with their creditors. A debt management company will work on behalf of the person to renegotiate their debts as an alternative to bankruptcy or taking out an individual voluntary arrangement.

If you are repaying creditors every month, and struggling to make ends meet, a debt management plan could be the solution. A debt management company may be able to take your debts and reconsolidate them into one affordable monthly payment. This payment will be made, not to multiple creditors, but to your debt management company who will forward it onto your creditors on your behalf.

As with all financial consolidation schemes, there are advantages and disadvantages to debt management plans. The most important benefit is that you clear all of your various debts in one move and replace them with one sensible monthly payment. Because you have taken many debts and reduced them into smaller monthly payments, you will find making payments easier every month.

If you have struggled with debts for a period of time, you may have received phone calls, letters and even home visits from people chasing their money. With the debt management plan, this all stops instantly and your only debt is now the debt management company. With no more direct dealings with creditors, you won't need to panic every time there's a knock on the door. Peace of mind and one simple payment plan.

Despite the obvious benefits of the plan, there are a couple of small issues that need to be considered. When you take a debt management plan, your repayments will be reduced but this inevitably means that your repayment period will be extended. By repaying the debt over a longer period this could have a negative effect on your credit score - although when compared to the alternative of bankruptcy it is a far superior option.

Unfortunately, due to the debt management plan being an informal agreement, the creditors can actually pull out at any time. This scenario is highly unlikely as creditors will look to make as high a return as possible on the debt you owe, again seeing bankruptcy and the possibility of the debt being written off as a far less suitable option.

So, if you're considering taking a debt management plan, look into these advantages and disadvantages before deciding if it is the most suitable financial solution for you.

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