Want to start a debt management plan? Have questions? Cashfloat discuss the most common questions about debt management plans.
- Creditors have a right to continue adding interest and fees while your DMP is in place, but many will stop.
- Your monthly DMP payment is calculated from any extra money you have available after paying your living costs each month.
Cashfloat.co.uk is a short term loans direct lender based in the UK, helping customers to overcome temporary financial difficulty. But what if you are experiencing long term financial difficulty?
A common solution for a long term financial crisis is a debt management plan. In this article, we will answer some of the most commonly asked questions about debt management plans.
Debt Management Plans: The Popular Debt Solution
The feeling of helplessness that many people experience when they are struggling with debt is common. Not only is it often difficult to find a solution, but the constant contact from creditors and pressure to repay debts can cause people to suffer from stress and depression which makes it even harder to think clearly.
The best way to gain some control back in your life is to confront your debts and to find a solution to them. There are many charitable organisations, such as StepChange, who are able to help people to find a solution to debt problems. One solution they commonly provide for people is a debt management plan. Read this article to get answers to some of the most commonly asked questions about debt management plans.
What Happens to Interest and Charges on a Debt While You’re on a Debt Management Plan?
This is one of the top questions that clients ask when they first get in touch to set up a debt management plan (DMP). While, with many DMPs, interest and charges are cancelled while the DMP is in place, the truth is that no debt management plan provider can guarantee that creditors will stop adding interest or charges. When people can’t achieve this with a DMP, they often have to go for an Individual Voluntary Arrangement (IVA) instead. These are a legally binding form of insolvency, rather than an informal agreement, like a DMP.
All creditors are within their rights to continue to add interest and fees, if they are in the original contract, even if you offer them payment under a DMP. Some people who begin a DMP will find that some of their creditors continue to add interest and charges, while their DMP is in place. However, in practice, many creditors will recognise that it is in their benefit if they do stop adding interest as this will increase the likelihood that you will ultimately repay your debts.
One thing to be wary of is debt management companies who claim to be better than other DMP providers at being able to stop creditors from adding interest or charges. This is a sales tactic and may be against the rules of the Office of Fair Trading. It is always better to have a DMP arranged by a free charitable organisation, such as StepChange or the Debt Advice Foundation.
Will Creditors Accept My Debt Management Plan?
Of course, there is no magic wand to wave to ensure that creditors will accept a debt management plan. However, when it comes down to it, most would rather get back the amount you are able to pay (if it is reasonable) than pressure you to pay an amount that you can’t. This might make it impossible for you to repay your debts and mean that they actually get back less money. If you are trying to do something about your financial problems and can make a reasonable offer, most creditors will try to work with you.
What Happens if a Creditor Says No to My Debt Management Plan?
This can happen and creditors have the right to refuse an offer you make in your DMP. The best course of action is to speak to your DMP provider and see what they recommend. It is usually advisable to make monthly payments as you planned, in your DMP, as this is what you can realistically afford to pay towards your debts. In many cases, creditors who refuse to accept a DMP offer will pass the debt on to a debt collection agency. While this may be disheartening, it is always possible to deal with the problem and your DMP provider will be able to advise you on the best course of action to take. In some cases, it may be necessary to deal with a creditor who doesn’t accept the offer you’ve made outside of your DMP.
What Happens if I Cannot Continue Making Payments?
If you can’t make a monthly payment, it is important to get in touch with your debt management plan provider. As DMPs are an informal arrangement, which your creditors have to agree to, it is possible that they may cancel your DMP if you miss a payment. Often, if you are unable to make a payment, your DMP provider will review the amount that you are paying each month and your DMP will be extended to accommodate the missed payment. For many people, if they are cooperative, it will take more than just one missed payment for a DMP to be cancelled.
If you are unable to make a payment it is important not to take a rash course of action, such as borrowing more money to resolve the situation. Please do not attempt to apply for a payday loan in this situation. Often clear communication with your DMP provider and your creditors will allow for the necessary adjustments to be made. If your creditors can see that you have genuine reasons for missing a payment, it will usually be possible to continue a DMP or renegotiate it to more manageable payments.
The most important point is to keep in touch. A two way conversation is always better than silence from one side.
How are Monthly Payments Calculated?
All payments under a debt management plan are worked out as a monthly amount. There is no set amount to pay under a DMP. The amount that you pay will depend on how much money you have available.
Your DMP provider will work out how much you can pay by looking at how much money you have spare after you have paid your priority debts and living expenses each month. Any money that you have spare will go towards your DMP. Your monthly payment should leave you enough to cover all of your priority debts and to provide a reasonable quality of life to you and your family in your living expenses.
If you opt to have your DMP arranged by a fee charging debt management company, they will include their fee in your monthly payment and less of your money will go towards paying your debts.
When Will Payment Reach my Creditors?
One of the regulations that debt management plan providers operate under is that they must not hold on to payments. Most will send out the funds within five working days after they have received them from you. Often, payments are made by bank transfer and are received by creditors on the same day that you make them yourself.
If you are unsure, you can ask your DMP provider to explain when the funds will be distributed.
What Debts Can You Include in a Debt Management Plan?
Normally, debt management plans are used to pay unsecured debts, such as credit card bills and overdraft payments. Normally priority debts and debts where court action has already been taken will not be included in a DMP. However, if you have fallen into arrears with your priority debts, such as by missing a mortgage payment, you will be able to add the arrears into your DMP. While you are paying off the arrears, in your DMP, you will need to make your normal monthly payments towards your priority debts. After you have cleared the arrears for these debts, you will still pay the same amount to your DMP with the extra money going towards your non-priority debts.
How Will a Debt Management Plan Affect My Credit Rating?
As the payments you make towards your debts under your DMP will be less than the payments you originally agreed to make, this will have an effect on your credit rating. Also, although there isn’t a specific debt management plan note that can be made in your credit history, creditors who accept your DMP will often add a ‘payment arrangement’ note to the debt that you owe to them. This is known as a ‘DMP flag’ and future creditors will take note of this. You can speak to your DMP provider to get a clearer picture of how much your DMP will affect your credit score.
More questions about DMPs
Even if you’re on a DMP, it’s still possible to receive a County Court Judgment. However, being enrolled in a payment plan demonstrates to your creditors that you are committed to making regular and manageable payments towards your debts.
In a DMP, priority debts, such as essential household bills, mortgages, or debts already subject to court action, are usually not included. It is important to continue paying these priority debts as agreed.
Since a DMP is an informal agreement, there is no legal obligation for you to stay in a DMP until you complete it. Therefore, you can leave a DMP at any time and explore other debt solutions, such as an Individual Voluntary Arrangement (IVA) or any alternative option you find suitable.
Having a DMP should not impact your employment. Unless your employment contract explicitly requires you to disclose if you have a DMP, you are not obligated to inform your employer about it.
In Summary…
These are just a few of the top questions that people ask about how debt management plans work. If you would like more information about DMPs, then read the rest of this guide. Cashfloat, a UK short term loan provider, explains everything you need to know about how they work and who to go to start one. In the next chapter, read about how you can set up your own debt management plan.
