The Pros and Cons of a Debt Management Plan
A debt management plan (DMP) is one of a number of different solutions available to help you manage and reduce debt. In a debt management plan, most or all of your creditors can agree to accept a lower monthly payment over a period of time to help you pay off any outstanding balances. Some of your creditors may agree to assist you by freezing interest and/or further fees and charges on current debts. However, it is important to remember that they are under no obligation to do so and this isn’t guaranteed.
Below we will look at the main advantages and disadvantages of a debt management plan. This will give you further information and help you make an informed decision on whether this is the right solution for you.
We strongly recommend speaking to one of our qualified debt advisors to see what would be the best solution for your individual circumstances.
Choosing a debt management plan (DMP) to manage your debts has a number of benefits. Here are some of the main advantages:
• Comfort from creditor harassment: You should expect significantly less contact from your creditors if a DMP proposal is agreed. They will no longer continue to constantly pursue you for any monies owed if they are satisfied with your proposal.
• Professional Representation: When you enter a Debt Management Plan, your Debt Management Company will contact your creditors on your behalf. They will make arrangements with your creditors to repay your debts at lower affordable amounts. This will give you peace of mind knowing that you have a professional conducting negotiations with creditors on your behalf.
• Reducing your monthly payments: One of the main advantages of a DMP is that over a period of time, you will reduce the amount you are paying towards any debt on a monthly basis. This will allow you to either pay off debt faster by increasing the monthly repayment amount or free up funds for living expenditure. This will help you remove yourself from the problematic debt cycle, as you will be less inclined to take out further credit.
• Avoid formal insolvency: DMPs are considered to be informal debt solutions. Ultimately, this means that they are a lot more flexible and not legally binding. As an advantage, your details will not be recorded on a public insolvency register. You will avoid the detrimental sanctions that can arise from a formal insolvency solution. Examples include: bankruptcy, assets being at risk, or even limiting and restricting current and future employment options during this period.
Choosing a debt management plan (DMP) to manage your debts also has a number of drawbacks. Here are some of the main disadvantages:
• A DMP is not legally binding: This can also be a drawback, although the informality has its benefits as discussed above. Having less communication with your creditors is great but they are not legally required to cease all contact with you. The terms of a DMP are not legally binding for you or your creditors. This could mean that although you have the option to exit a DMP, so do your creditors. They are not legally required to freeze any interest, fees and charges on any debts.
• Rejected DMP proposals: All of your creditors that you owe money to will have to agree to the proposal terms for you to proceed with a DMP. Alternatively, you only need a majority vote from some creditors in an IVA or Protected Trust Deed proposal, these are also legally binding.
• DMP completion time: DMPs do not have a fixed time period, they will depend on how much debt you have, sometimes they can exceed 10+ years. A formal insolvency solution such as bankruptcy, sequestration, IVA, or protected trust deed may write off most or all of your debts in less time. However, it is important to remember that this calculation is based on a number of factors such as your total debt level and your monthly repayment amount.
• A DMP could be more expensive than formal insolvency: You will be expected to pay your debts in full within a DMP. This can mean that they may cost you more in the long run when compared to a formal insolvency solution as these will write off a proportionate and substantial amount of your debt. If your creditors refuse to freeze interest, fees and charges, this can increase your plan duration. Arranging a DMP through a private company will also require you to pay an administrative fee, which will be added to your monthly repayment plan.
We strongly recommend speaking to one of our qualified debt advisors to see what would be the best solution for your individual circumstances and to help you make the right decision.
Contact Refresh Debt today on 0800 121 48 63 to discuss your options and see if a debt management plan (DMP) is right for you.