The Debt Management Plan Process

Step 1: Is a DMP right for you?

If your circumstances change during your loan term, your creditor will understand this, so the first thing to do is get in touch with your creditor and ask for a more affordable repayment plan and see if they will freeze your balance so additional interest doesn’t continue to accrue whilst you’re repaying the debt. Remember, creditors want to help you to repay your loan without it putting you into major difficulties with your priority bills and essential living costs.

However, if you’re still thinking about entering a DMP because you have multiple loans that you need arrange to repay, but you’ve got a relatively good handle on your finances, then you might just need some debt advice.

Debt charities like StepChange and National Debt Line can offer free advice to help you get your finances in order, so you can take control and tackle your debts yourself. They will give you the necessary tips and guidance, so you can set up repayment plans with your creditors without the need for third party involvement.

However, if you are feeling bogged down and stuck and you’re struggling to organise your finances yourself, a DMP can be a great help to get your finances on the right track.

Step 2: Choosing your Debt Management Company

The main thing to remember here is what works the best for what you can afford. If you choose a debt management company that charges a fee for helping you manage your debts, it will take longer to pay your debt off and you will end up paying more in the long run, whereas free companies and charities give advice and help to you free of charge.

So if your financial situation changes, and you find yourself worried or struggling to keep on top of your commitments, you can speak to impartial and independent debt advisors, such as StepChange (www.stepchange.org), the National Debt Line (www.nationaldebtline.co.uk) or Consumer Credit Counselling (www.cccs.co.uk). Arranging debt management plans with a free service means you can avoid paying fees to commercial advisors, and you will be totally in control of your finances. Your debt lifetime will be much shorter and you will only repay the debt you are currently in.

Step 3: Let creditors know you are entering a DMP

Once you’ve decided that you are going to set up a debt management plan and you’ve engaged with your chosen debt management company to start the process, you should also get in touch with all your creditors and update them on your situation.

Either call or send a quick email identifying yourself and the debt management company you have chosen to work with, and including your reference number for the creditor and your reference number for your debt management company. This way the creditor will hopefully be willing to agree to freeze your account and they know who to contact if they have further question regarding your debt management plan.

This process can be done together with informing your DMP company who all of your creditors are and how much you owe to each one, as the basis to start setting up your plan.

Step 4: Create a budget sheet

Your debt management company will walk you through this as each provider will have its own individual approach, but essentially you will draw up a list of all your income and expenditure on a monthly basis. Once you have a good picture of how money you have coming in and going out per month, you can see much disposable income you have (income left over after tax and priority bills e.g. rent, council tax, utilities) which will help you decide how much you can afford to repay your creditors.

Unfortunately, tackling debt isn’t an easy exercise, which is why getting support from advisors, friends and family is crucial. At this stage, it is important to remember what items are essential and where in your expenditure you can cut down: life’s little luxuries will have to go on hold for a while as getting out of debt should be your main priority.

For tips on how to cut down your spending and save a little each month, check out our blog here.

Step 5: Entering your DMP

In most cases, this is a quick and easy step. You set up your payments to your debt management company each month based on what you can afford from your budget sheet, and that’s all you have to do. Your DMP provider will split your full payment between your creditors, so each creditor gets a pro-rata, i.e. proportionate amount of your discretionary income that you can afford to contribute.

For example, if you have total debts of £500, but you can only afford to pay £80 per month towards clearing everything, over a total of four different creditors, this is how your one monthly payment would be broken down and paid to each of your creditors.

Step 6: Keep up with your payments.

It is important that once your DMP is set up, you maintain your monthly payments and budget accordingly. Most creditors will comply with your DMP but if you miss your payments they may start chasing you for payment directly again and proceed with further action against you such as placing a Default on your credit file or transferring your account over to a debt collector.

You can search these terms in our Clear and Fair loan glossary if anything is unclear.

If you do have a change in circumstances and can no longer afford your agreed monthly payment, you must let your debt management company know as soon as possible as they may be able to agree a token payment to creditors or a hold on your account for a short time. Similarly, if you can afford to increase what you pay each month to help settle your debts more quickly, let your DMP company know.

REMEMBER: DMP companies may cancel your DMP if you regularly miss your repayments and fail to show your commitment to repaying your debts.

Maintain contact with both your debt management company and your creditor, as that way they will be much more inclined to offer you help and support.