What is a Debt Management Plan?

bulram | July 24, 2012

What is a Debt Management Plan

With increasing numbers of people having large amounts of debt these days, it is little wonder that some have trouble in paying it back. The lack of stability in the job market has also led to all manner of stress-related illnesses as well as the increased chance of work-related injuries because of longer working hours. For those who have lost their regular income, paying back debts can become a real struggle.

Before the economic downturn many people were actively encouraged to take on higher levels of debt. It was incredibly easy to borrow quite large amounts of money through loans and credit cards. Because of the recession, however, increasing numbers of people are finding it difficult to pay that money back. This in turn has led to a rise in the number of debt management companies that are offering solutions for the many thousands of Britons who are struggling to pay their bills.

Ways to Get out of Debt

One of the most popular services offered by these debt management companies is the debt management plan, or DMP. This can be a really useful way for people to manage their repayments and rid themselves of debt without having to take on more borrowing.

A debt management plan is a great alternative to bankruptcy or insolvency for many people. The companies that offer this kind of service will negotiate with all your creditors in order to provide you with a lower monthly payment. The debt management company will then allocate this money fairly between all your creditors while still leaving you with enough money to live on.

The money you need to live on is worked out by taking into account how much you need for your rent or mortgage and to provide for your children. In order to be eligible for a DMP, you should be able to pay at least ?100 a month towards your debt, although in exceptional circumstances this figure may be reduced to ?80. This means you should have enough money to pay the rest of your bills, while effectively reducing your level of debt at the same time.

Debt Management Plan – Advantages and Disadvantages

While arranging a debt management plan can certainly help you to get out of debt, they are not without their disadvantages. Naturally, most debt management companies will charge a fee for their services, so that not all of your monthly payment will be used to pay off your creditors.

This means that they are not suitable for everyone. It will depend on your personal circumstances as to whether a DMP is the right option for you.

One of the biggest disadvantages of a DMP is that it will take you longer to pay off your debt. It may be the case that some of your creditors won’t freeze the interest, which means that you could end up paying much more than you would have done without the plan.

Taking on a DMP may also affect your credit rating.

If you wish to borrow again in the future and can manage to pay your creditors at the moment, a debt management plan may not be right for you.

While there are downsides to taking on a DMP, it can be a really effective way to keep your head above water while getting out of debt. If your financial difficulties are likely to be short lived, or if you only owe a small amount of money, then this could be a good solution to your debt problem.