Debt Management Plan

From Consumer Wiki


Debt Management Plan

A Debt Management Plan is an arrangement between you and your creditors to enable you to repay your debts with a regular payment you can afford. Debt Management Plans are not legally binding.

People get into debt for a number of reasons, in most cases it is not because they have been reckless or even careless but, is often the result of a change of circumstances such as: loss of income through job changes, divorce or separation, illness and other life changing events.

There usually comes a point when they realise that they have to take some drastic action or they will never see an end to the phone calls and letters from the people they owe money to. Their debts are often increasing on a daily basis with added interest and charges and their payments are not actually reducing the balance.

A debt management plan will put you back into control without borrowing more money (experience shows that this can just make things worse). With only one payment to make and a realistic chance of getting your interest and charges frozen and no fees taken out, your debts will be repaid as quickly as possible.

Is a Debt Management Plan right for me?

A Debt Management Plan can be a debt solution for the following types of people:

  • Anyone who has unsecured debts that they can't afford to repay.
  • For people who have lots of equity in their properties but do not want to remortgage or take out a secured loan.
  • For people who do not qualify for an Individual Voluntary Arrangement (IVA). This would be for people with debts under £12,000.
  • For people that owe money to several different companies.
  • For people who do not want their wives, husbands, partners or spouses to find out about their debts.
  • For people that just need a short term solution to their debts. For example they will be selling their house shortly so can pay off all their debts.
  • People, who can, if they really push themselves, pay their debt in full but don't want to change their lifestyle.
  • People who just don't want to deal with their debts and would rather use a third party to do it.

What are the advantages of a Debt Management Plan?

  • you will have almost instant access by phone to the Debt Management Organisation and will not have to wait to see someone
  • some people like the anonymity of a telephone service run by a Debt Management Organisation
  • you do not have to do any work in relation to your debts, for example, drafting letters to creditors
  • there is only one payment to make - to the Debt Management Organisation - and the company distributes the money to the creditors.
  • you do not have to pay several different companies. Instead only one payment.
  • if the plan is carried out successfully all Interest and charges are usually stopped.
  • you only pay what you want to so that you have enough left over for a healthy social life.
  • you will no longer need to speak to your creditors in order for debt elimination to take place

What are the Disadvantages of a Debt Management Plan?

If you are thinking of using a debt management plan, you should be aware of the following:

  • Debt Management Plans have no legal standing.
  • if your monthly payment is low and your debts are high them you will most likely be in a plan for the rest of your life.
  • a lot of debt information is needed.


  • Debt Management Organisations are usually only interested in customers who have some available income and own their own home, so that the home can be used as surety against the debts
  • many Debt Management Organisations deal only with non-priority debts and you will have to deal with the more important priority debts yourself
  • if the Debt Management Organisation does deal with priority debts, it may not pay off priority debts before non-priority debts
  • most Debt Management Organisations charge a fee which can be quite high. Fees can be typically about £200. This leaves you with less money to pay off your debts
  • many Debt Management Organisations will expect a one-off deposit at the start of the agreement with the Debt Management Organisation, in addition to the fee you have to pay. This leaves you with less money to pay off your debts
  • most Debt Management Organisations also charge an administration fee to the customer each month, to pay for the distribution of payments to creditors, in addition to fees and deposits. You need to check if it does and if so, how much it is. It may be up to £30 per month. This leaves you with less money to pay off your debts
  • you need to check whether, you can cancel at any time if you are not happy with the service. Check whether you will get your deposit back. You must insist that your Debt Information is returned
  • if the debts are rescheduled by the DMC, creditors may consider the account to be in default. Some Debt Management Organisations take all of the first months' payments as a fee. This puts the account into arrears by a month or more. These arrears will be recorded on your credit file.
  • most Debt Management Organisations do not give financial advice, and cannot advise on, for example, entitlement to benefit
  • many Debt Management Organisations do not give financial advice and so do not give customers details of all the options open to them with the advantages and disadvantages of each.

Is a Debt Management Plan a type of loan?

A Debt Management Plan is not a loan. All it does is place your debts with a third party who deals with your debts for you.

A Debt Management Company doesn't buy the debt from your original creditors nor do they give you money to cover your existing debts. They help you to manage your debts by offering a reduced payment to each of your creditors and then negotiate to freeze interest and charges.

There are no credit checks to pass in order for you to clear debts. Consumers attempting to take control of their debts are being warned to beware of unregulated loans that can lock them in for years and leave them at the mercy of sky-high exit charges.

As the name suggests, these loans fall outside the normal safeguards we have come to expect when we borrow money. They are typically loans made to individuals, outside any mortgage arrangements, for amounts above £25,000.

Personal loans for amounts below £25,000 are subject to the Consumer Credit Act. This ensures lenders cannot impose excessive fees or conditions on their customers.

These protections are particularly valuable when borrowers want to pay off debts early. In these circumstances the Act says lenders cannot charge a fee of more than one month's interest. Where the term of the loan is one year or less, no early repayment charge can be made.

Mortgages, although usually for more than £25,000, have their own protection provided by the Financial Services Authority. Its rules mean that when borrowers repay a mortgage early or fall into arrears, charges are limited to the costs the lender incurs.

You can Clear Debts.

None of these safeguards is enjoyed by borrowers taking out unregulated loans. Unregulated lenders include complicated and costly repayment penalties in the small print of their contracts. Arbitrary charges for early repayments are common and penalties can lock borrowers in for years, during which time they are also at the mercy of rising interest rates.

How long will I have to pay a Debt Management Plan before I am debt free?

The length of your DMP depends on your individual situation. It also depends on your level of debt and monthly surplus when creditors freeze interest and charges, the length of the DMP can be dramatically reduced.

For example: If you owe £25,000 and you can afford to pay £250 per calendar month the DMP will last for just over 8 years (100 months). This applies only if the payments are maintained each month and the creditors freeze interest for the duration of the plan. Your DMP can be completed sooner if your circumstances improve and your payments can be increased.

If you are worried about your debts, try not to panic but do not ignore your problem. Talk to the people or organisations you owe money to and let them know that you are having problems. Most organisations will be more helpful if you approach them first.

If you have more than one outstanding debt, or have fallen behind in paying your bills, you need to work out which debts are priority debts. A priority debt is one that could have serious results if unpaid. Not paying your rent or mortgage would leave you homeless, or not paying your gas or electricity bill could leave you being cut off and taken to court. When you have decided which are priority debts, work out how much you can realistically afford to pay back.

You will need to think carefully before taking out further loans to pay off existing debts. You may end up paying back a lot more than you borrowed and the interest rates may be extremely high. Some loans can be secured against your home and you could end up losing it if you fail to make repayments. Check your income and see if there are any benefits or tax credits you are entitled to that you are not getting.

Look carefully at your spending and see if there is anything you are able to cut down on, again you can work out what are priority expenses and what things are not so necessary. You can also look at ways of reducing your outgoings, for example you could shop around for a cheaper gas or electricity provider, or look at cheaper mortgage or insurance providers.

How much does a Debt Management Plan cost?

Nothing, with organisations such as Payplan or Consumer Credit Counselling Service, its completely free. They are funded by the credit industry, which allows them to offer completely free debt management plans. This means whatever you can afford each month goes directly to your creditors to reduce your level of debt. For example if you can afford to repay £250p/m all of that money will be distributed to your creditors pro rata, Payplanand CCCS take nothing out.

There are, however many debt management companies that charge by either requiring a start up fee or a monthly management fee, which can be anything from 15% - 17% of the monthly payment.

Debt reduction should occur under most debt management companies charge a fee. They offer either to consolidate your debt payments so that you make only one payment directly to the debt management company, or to negotiate with your creditors for you. If you are having to pay fees to a debt management companies, this leaves a lot less money from your available income to pay the creditors. Some debt management companies do not charge a fee to the customer, but are paid commission by the creditors on the assumption that the debt management company will recover some of the debt for them.

Neither advice agencies nor Debt Management Companies can guarantee a favourable outcome for you. Just because a debt management company is involved, this does not prevent creditors taking court action against you. Also, if a debt management company is involved, creditors are still not obliged to accept reduced payments or to freeze interest and unless they do, the debt will grow.

Beware of unrealistic levels of payment

Not all debt management companies produce realistic financial statements, because not all debt management companies conduct in-depth interviews with their customers about income and expenditure. You may then be committed to keeping up unrealistic levels of payment. In this case it is more likely that you will default on the payments because they are not affordable.

Some creditors refuse to deal with debt management companies. If a creditor will not deal with a DMC, you will have to deal separately with that creditor. However, debt management companies often inform customers that they should have no further dealings with the creditors, and that if the creditor does contact the customer, the customer should pass any correspondence on to the debt management companies. This may result in creditors taking action - including court action - against you which you do not know about. The end result will not be debt reduction.

How much money will actually go to the companies I owe money to under a Debt Management Plan?

This depends on your surplus income (i.e. money you have left over every month after paying all your living expenses) and how much you owe each creditor. Your surplus income is divided pro rata between your creditors.

The debt help team can confirm that a debt management plan is based on what you can afford. The amount you pay is based on the simple calculation “Household income less reasonable household expenditure'.

Before you can tackle a debt problem and really get debt help you need to collect together information about your money affairs and follow some simple steps.

  • Make a complete list of your debts. Remember to divide them into separate headings - priority and non-priority. You will have to make offers to pay off your priority debts before you tackle your non-priority debts.
  • Work out your income and expenditure. Be honest and make sure that the amounts are realistic. Your resulting budget will show you if you have any money left over to divide up between your creditors. You may even be able to identify where you can make some savings. *If you encounter problems, an advice agency can give you confidential advice on what to do.
  • Do not ignore creditors' letters or phone calls. Contact your creditors as early as possible and explain to them why you are in debt. If you phone, you should follow up the call with a letter, confirming what you said on the phone. Send all the creditors a copy of your budget and the list of your debts. If you do not feel confident to deal with your creditors, contact a free advice agency.
  • If you have only a small amount of money available for your creditors after your essential spending, you may have to offer all of this to your priority creditors. You could have very little, or nothing, to offer to non-priority creditors and you should explain this to them.
  • Do not borrow more money to repay your debts. Think about the ways in which you might earn extra money or increase your income instead. If your income is low, you may be able to claim benefits.
  • If a creditor is pressurising you for payment, it may be because they are not aware of your financial circumstances. If you tell them creditor about your difficulties, they may agree to accept reduced payments from you. In some rare circumstances, a creditor may give you a short payment holiday.
  • Although creditors are allowed to send reminders to you if you are in debt, they are not allowed to harass you. If you think you are being harassed, or if a creditor is not listening to you, take advice from your local Citizen's Advice Bureau or other advice agency. If you do not feel able to approach your creditors yourself, a Citizens Advice Bureau or another free advice agency may be able to help you.
  • Often, you will have more than one priority debt, or will have a mixture of priority and non-priority debts. It is important to make a list of all your debts and let each of your creditors have a copy of the list. When trying to work out what you can afford to pay, the creditors will need to know your full financial details.
  • The creditors will also want details of your family's income and expenditure. How you deal with your debts will differ, depending on whether you have any income to spare after you have paid your mortgage or rent and met the costs of essentials like food, clothing and transport.
  • You should also look at whether you have any assets that are worth selling, and whether your situation is likely to get better or not.
  • If you have only a couple of non-priority debts, you could consider transferring the debts to another account which charges a lower rate of interest. However, paying a lower rate of interest can mean that you pay off the debt over a longer period of time.

How do I make the payments?

Most clients pay their debt management plans by standing order from their bank accounts.

Some clients prefer to pay by cheque from their current account. Other clients prefer to use a paying slip and pay at the bank, building society or post office counter.

Alternatively, with Payplan you can use PayPoint, which is a service for those who cannot pay by cheque or standing order but can pay by cash. Payplan will provide you with a swipe card, which you can take to your local Spar or petrol station along with your cash payment. There are over 7000 PayPoint outlets nationwide

If I have a change of circumstance can I stop the Debt Management Plan?

You are, of course, free to stop the DMP at any time, but you should provide notice so all of your creditors are informed If you are experiencing further financial problems and cannot afford the payments, please let the Debt Management Organisation know. They may be able to restructure the plan for you.

Please note: Once the plan is cancelled, creditors may resume interest and charges.

Important points to note:

  • don't panic or ignore the problem: unopened bills won't go away
  • you can't ignore your debts. Better to pay a small amount than nothing at all - those you owe money to may be prepared to accept low repayments
  • if struggling with store or credit cards stop using them
  • work out a realistic budget that covers all your income and spending. Check whether there are any benefits or tax credits you are entitled to that you are not getting
  • decide which debts take priority - like mortgage or rent - and which cost you most through penalties or higher interest rates
  • only agree to pay off debts at a rate that you can keep up - don't offer more than you can afford
  • contact those who you owe money to as soon as possible. Let them know that you are having problems. Many companies will be helpful if you talk to them
  • if organisations won't accept your repayment offers, seek advice

if you get a threatening letter get advice from your local Citizens Advice Bureau or trading standards service

  • if a debt collector calls at your home you don't have to let them in. If you want time to get advice arrange a later appointment. If a debt collector or lender harasses you contact your local Citizens Advice Bureau or trading standards service
  • check if a loan will be secured on your home. If it is and you do not keep up repayments you could lose your home. If you do not understand the terms of a loan get advice.
  • if you're thinking of taking out a new loan to pay off debts make sure you find out the total cost of the loan, not just the monthly repayments
  • think very carefully before borrowing more to pay off your debts. Get impartial advice and *don't rush into signing anything you don't understand
  • if you are thinking of using a fee-charging debt management company, then make sure you understand exactly what you are signing up to - check what fees you will be paying to a debt management company and how long it will take you to pay off your debts
  • keep copies of all letters you send and get about your debts so you have proof of the debt reduction.process

Who tells the companies I owe money to that I am actually in a Debt Management Plan?

There are two different types of debt management plans:

  • The type where you are provided with standard letters and you are in charge of making pro-rata payments. Using this method you are in change and control of dealing with your creditors.
  • The type where are third party contacts all your creditors. Using this method your financial situation is illustrated by a set of papers called a common financial statement.

Payplan/CCCS or the Debt Management Company will contact your creditors if you enter into a DMP, they will explain your situation, show them your income and expenditure and make an offer of payment to them. They have a great reputation with the creditors and deal with them often, this means you don't have to communicate with your creditors personally and helps to ease the stress involved.

Will the companies I owe money actually accept a a Debt Management Plan?

Creditors don't actually have to agree to the payments in order for you to send them the money. You can only offer what you can afford and no more, the creditors know this but can use common phrases to try and get you to increase your payment.

Under the Debt management plan the money is sent based on what you the client can comfortable afford.

Due to Payplan's and CCCS's reputation in the credit industry, many creditors accept their offers, as they know they work to realistic guidelines

How will a Debt Management Plan affect my credit status with Experian, Equifax and Callcredit, the three main credit reference agencies?

If you are already in financial difficulty your credit rating is likely to have been affected already. Whenever the full contractual payment isn't made (even if the payment is just a few pounds short) it will still affect your credit rating as you are not complying with the credit agreement. A DMP can help clear your debt quicker by getting interest and charges frozen, so your credit rating will be effected for a shorter period. A DMP will not show on you credit file.

After the agreed payment period is over your credit will start to improve itself. Consumers should note that negative entries stay on your file for 6 years.

Will a Debt Management Plan stop all the companies that I owe money to constantly telephoning me and sending me letters?

Unfortunately your creditors are still entitled to contact you directly so Payplan cannot guarantee that all letters and phone calls will stop immediately, but we can get them down to a minimum and once the DMP is well established they should stop altogether. All correspondence you receive from your creditors whilst in a DMP arrangement should be sent to your case officer to deal with.

It is often difficult to know what to do when you feel a creditor is not dealing with your account fairly. If you do not pay, your creditors are allowed to keep reminding you from time to time but they must not act illegally. Many activities could be classed as harassment but this is often difficult to prove. It is important to note that 'anything done by a person which is reasonable' when trying to recover a debt, is not considered to be harassment.

Guidelines have been put together by The Office Of Fair Trading giving guidance on what activities may be considered as harassment and should therefore be avoided by creditors. Creditors are warned by the Office Of Fair Trading that they should not:

  • Bring unreasonable pressure to bear on you in default of payment
  • Falsely claim that criminal proceedings can be brought for non-payment
  • Falsely imply that they may legally seize property or take other action without going to Court
  • Impersonate a Court or any other official person, by letter or by telephone
  • Make nuisance visits and phone calls, or use abusive or threatening language in person, by letter or by telephone
  • Leave messages for you to contact someone urgently with no explanation
  • Contact you at work, or the customer's employer with intent to create embarrassment and create fear of dismissal
  • Wait outside work on payday
  • Park outside your door in a vehicle marked 'debt collectors'
  • Call on the neighbours, pretending to believe the neighbour is you
  • Send insufficiently addressed postcards

You cannot be prosecuted in the Criminal Court because you have not paid a consumer debt, but some creditors may try to make you think you can, this is also illegal.

If you feel you are being harassed, you may take the following action:

The first step is to write to the creditor and outline your concerns regarding the company's behaviour.

Inform them that you are familiar with the terms of Section 40 of the Administration of Justice Act and ask that the creditor take steps to avoid similar occurrences in the future.

Make suggestions as to how you would prefer to be contacted by the creditor and ask that they confirm their agreement to this in writing.

However if you do feel the need to make an official complaint regarding a creditor, this should firstly be made to your local Trading Standards Officer. If Trading Standards will not act it may be worth contacting the Office of Fair Trading.

Will I receive a regular report to inform me that my debts are actually going down?

A report that is sent to you monthly will confirm all of your payments dates and amounts. Payplan, for instance, have an exclusive website for tracking your payments called Justabank. This website allows you to view the payments we have received from you. You will also be able to track individual payments to each of your creditors and confirm exact dates. Once you enter into a Payplan arrangement your personal case officer will give you your login details so you are able to track your payments.

Creditors occasionally say they haven't received a payment, which is often untrue; they are just trying to get you to pay more. If you ever suspect your creditors aren't being paid you should get in touch with your case officer

Occasionally creditors may sell you debts on to other companies or pass you on to a debt collection solicitor. If this happens you may be contacted again. You should immediately contact the debt management team and this will be resolved.

It is a criminal offence for a creditor to needlessly upset you to get you to repay.

Harassment includes:

  • threatening you with a criminal prosecution when you can't be prosecuted;
  • pretending to be a court official;
  • sending letters which look like court forms; and
  • telling other people, such as neighbours and your employer, about your debt to force you to pay.

If you are being harassed, keep a record of exactly what happened and when, and report it to your local trading standards department at the Council. A creditor could have their credit licence taken away, if they are found guilty of harassing you.

If the creditor ends up taking you to court to get you to repay, you can tell the court about the harassment then. This could reduce the court costs you may have to pay. Some types of harassment may also break the Human Rights Act.

Can I continue to use credit?

You should not to obtain any more credit whilst in the DMP. It can be considered fraudulent if you take out credit when you know you can't repay it. The debt management plan will make sure you have enough money to live on, so you shouldn't need to take out any more credit. There are of course exceptions, such as a company credit card where you are not liable for the payments, but you should declare these to your case officer to avoid any problems.

Once the Debt Management Plan has been set up does it mean that I will have to keep paying interest and bank charges?

Creditors aren't obliged to freeze interest and charges but the creditors are often more cooperative as they see that the debtor is making every effort to clear their outstanding debts. The creditors may look at your income and expenditure when deciding to freeze interest and charges.

Can I include secured loans in a Debt Management Plan, such as car finance or mortgage? It is very important to understand that debts which have underlying security related to then cannot be put into a plan.

Your secured debts i.e. mortgage and car HP can't be included in a DMP, if you are unable to make the contractual payments to your secured debts you are at risk of losing the item to which the loan is secured on e.g. a car or house. Your secured debt repayments should be included in your income and expenditure. You should never get into arrears with your secured debt


If you fall behind on your car payment your car may be repossessed

If you call behind on your mortgage or secured loan payments your home can be taken from you.

Can the companies that I owe money to threaten to take my house or flat once that I am in a Debt Management Plan?

No, a DMP is an alternative to bankruptcy and isn't legally binding so you won't lose your home if you continue to make the agreed payments into your DMP. It is always a priority to ensure that your property is not at risk and allowances will be made within your income and expenditure to keep up the payments on any mortgages or loans secured on your property. Providing you do this then there is no reason why your property should be at risk.

If you can’t meet your mortgage repayments, or you’re worried you might fall behind, it’s important to contact your lender as soon as possible. Lenders have procedures for tackling payment difficulties and they’ll try to help. You can also get free independent advice from other organisations.

Contact your lender and agree a plan

Mortgage lenders are keen to help their customers sort out any payment difficulties. Also, the law says they must treat you fairly and take your circumstances into account. They may be able to come to a payment arrangement with you.

If you're struggling to make the payments

Depending on your payment history and whether your difficulties are likely to be long or short term, your lender might agree to:

  • reduce your payments for a set period
  • charge you interest only for a while, if you've got a repayment mortgage (usually you pay capital and interest)
  • give you a 'payment holiday'

e*xtend your mortgage term to reduce your payments

If you're already in arrears

If you've already fallen behind, your lender will suggest a way to pay off the arrears gradually, alongside your usual payments. If you can't meet the extra payments, you may be able to delay them for a while or add them to your loan. Again, it depends on your track record.

Always pay what you can

Pay as much as you can manage every month. Keeping up regular payments (even if they vary) shows that you're committed. Your lender's more likely to treat you sympathetically and you'll minimise the arrears charges too.

If you took out your mortgage on or after October 31 2004

The Financial Service Authority (FSA) regulates most mortgages taken out from this date. Under FSA rules lenders must treat you fairly and send you regular statements to keep you informed about your current arrears position. There are also rules covering what the lender must do if it intends to repossess your home.

If you don’t keep up your repayments

It’s very important that you don’t ignore any payment problems. Mortgages are ‘priority debts’, which you should pay off first as your lender could repossess your home and sell it to get their money.

Working out how much you can afford

Your lender can help you work out how much you can afford, but you may prefer to do this yourself. A good starting point is to write down all your income and outgoings (apart from the mortgage) and see what you’ve got left. The Financial Services Authority (FSA) has an online budget calculator you can use.

If you've lost your job or can't work because of illness

If you've lost your job or you're too ill to work, check whether you've got 'mortgage protection insurance' to cover your payments. The insurance payments may not start straight away - so contact your insurer as soon as possible.

Benefits that might increase your income

It's worth checking if you're entitled to benefits such as Working Tax Credit, Child Tax Credit or Council Tax Benefit. They can make a real difference to your income and help with your mortgage payments.

Can I include all my debts in a Debt Management Plan?

A debt management plan will only help you with unsecured debts.

Examples of unsecured borrowing:

  • Personal loans
  • Overdrafts
  • Credit cards
  • Student loans
  • Store cards
  • Secured borrowing

Secured Borrowing is when the lender has a legal charge over some property of yours, so that if you default on repayments, they can possess that property and sell it to get their money back.

Why do I have to change my bank account?

If you have a current account with a company you owe money to, you will be required to open a new bank account. This is not only the case with a DMP but you should change your bank account if you are going to make reduced payments to a company that you also bank with. Banks have the Right to Offset so any money in your current account could be used to pay another debt with the bank.

Can my creditors still issue me with a County Court Judgement?

As a DMP isn't legally binding creditors could still take action against you, but this is less likely to happen. Even if a creditor applied to the court for a CCJ the payment should remain similar to what you are paying through a DMP

Will I get a Default Notice?

By entering into a DMP, your creditors can issue a default notice as you are defaulting on your original credit agreement. If you receive a default it doesn't automatically mean the creditor is going to take legal action. The default will appear on your credit file for 6 years from the date it was issued.