A debt management plan reduces your debt repayment to an affordable amount. You make a single payment into the plan and your provider distributes payments to your creditors.
Your creditors are asked to accept a reduced payment amount and to deal with your DMP provider instead of you. They’re also asked stop adding interest and other charges to your debts.
This is a very flexible type of debt solution. Your monthly payment can change if necessary and you can cancel the plan without penalty or a long notice period.
This debt solution may be suitable if:
1. You cannot afford your full debt repayments
2. You can afford to pay a reduced amount regularly
3. You are committed to repaying your debts
4. The debts can be repaid within a realistic timescale
Bright Oak is a direct and well-established provider of debt management plans. For expert debt advice and information please contact us.
Benefits of Debt Management
• Your adviser deals with your creditors for you
• You make a single consolidated debt payment
• Your household bills and expenses are prioritised
• Creditors often stop adding interest and charges
• The payment amount is flexible if things change
• You’re free to cancel the plan without notice
• No personal details added to a public register
• Joint debt management plans are available
• Unlikely to cause employment problems
• Doesn’t take account of your assets
Drawbacks of Debt Management
• Your credit rating will be damaged
• No guarantee that interest and charges stop
• No formal legal protection from creditors
• Your general expenditure is restricted
• No debt gets written-off
• Plans may run for a long period of time
Will Interest and Charges Stop?
Debt management plans don’t provide a guarantee that interest and charges will stop but, in reality, most consumer credit lenders will agree to this happening.
Lenders are required to be sympathetic and fair to customers who get into financial difficulty. Their regulator (the Financial Conduct Authority) identifies suspending interest and other charges as being a key option to help a customer who is struggling financially.
It is possible to ensure that interest stops for 60 days by using Breathing Space (if you live in England or Wales). This stops your total debt increasing while you get debt advice and set up your new debt solution.
Legal Protection from Creditors
A debt management plan does not provide you with formal legal protection from your creditors. However, your creditors are very unlikely to take legal action if a reduced repayment plan has been agreed.
A creditor’s obligation to be fair and sympathetic to customers in financial difficulty is one major reason why legal action is a last resort. However, creditors do retain the right to begin (or continue) using legal recovery procedures to collect what they’re owed.
You can guarantee legal protection from creditors for 60 days by using Breathing Space (if you live in England or Wales). This will temporarily stop named creditors from using legal enforcement action to recover money from you. Breathing Space provides formal legal protection while you get debt advice and implement a suitable debt solution.
Once again, this positive outcome results from creditors being required to treat customers fairly when they get into financial difficulty. The regulator expects lenders to accept fair repayment offers that are based upon a genuine affordability calculation.
Your DMP may be relatively short if your total debt level is modest and you can afford a significant monthly payment. By contrast, if your total debt level is large and your monthly payment is modest then it could take many years to complete your plan.
Your Credit Rating
Using a debt management plan (like other debt solutions) will negatively affect your credit score. This is because you’re not making the full contractual level of repayment as per the credit agreement.
This negative impact on your credit rating will initially be less severe than if you entered a personal insolvency process (like an IVA or bankruptcy). However, in certain scenarios the negative impact on your credit rating of a DMP might last for longer. People can (and do) rebuild their credit status once their debt issues have been resolved.
Most types of employment are unaffected by beginning a debt management plan. Personal insolvency debt solutions (like an IVA or bankruptcy) negatively affect more types of work.
We advise you to check your contract of employment (and any relevant professional regulatory standards) before beginning a DMP or any other type of debt solution. We provide further detailed debt solutions information if you:
You can jointly enter a debt management plan with your spouse or partner. This could help you to work together to improve your household’s financial position.
A joint debt management plan isn’t always the best way to address your household’s debts. It’s sometimes better for each partner to use a different type of debt solution that’s more appropriate to their individual financial position. Your debt adviser will inform you about your options.
Switching Debt Management Providers
You can switch your debt management plan to a new provider without any financial penalty or a long period of notice. Switching may be beneficial if you’re unhappy with the service that you’re receiving from your current provider.
You can also cancel your DMP and switch to a different type of debt solution. Making this change might be advisable if your financial position or your personal priorities have changed.
The following types of debts are often included in a debt management plan:
It doesn’t matter if any of the above types of debt have already passed to a debt collection agency. The accounts can still be included in your plan.
The following types of debt are usually unsuitable for a debt management program:
• Debts secured on property (mortgages)
• Rent arrears
• Debts secured on vehicles
• Other HP agreements for goods you need
• Student loans
• Court fines
• TV licence arrears/fines
• Child support or child maintenance debts
• Social fund loans
• Council tax arrears
• HMRC tax liabilities
• Tax credits or benefit overpayments
• Utility arrears at your current home
Direct payment arrangements should usually be agreed for these types of priority debts. These payments are then factored in to the affordability calculation used to agree your regular DMP payment amount.
Your debt adviser will ask you about your income, expenditure, debts, and any assets that you own. This gives the adviser a broad understanding of your financial situation. They will also ask questions to gain an understanding of your personal priorities and goals.
The adviser calculates how much you can genuinely afford to repay to your creditors. This is the amount of money left over after you have fully budgeted for your essential household bills and all other reasonable expenses.
Your adviser can now recommend suitable debt solutions to you, provide you with information about each of these solutions, and answer your questions.
Bright Oak charges an agreed fee to provide our professional debt management plan service. The agreed fees are collected from your monthly payment, with the remainder of your payment being distributed to your creditors.
Debt management plan providers and debt advisers are authorised and regulated by the Financial Conduct Authority (FCA). Customers of FCA authorised debt management firms can contact the Financial Ombudsman Service to resolve disputes.
You cannot choose to exclude a debt from a bankruptcy, an IVA, or a debt relief order. If you live in Scotland this also applies to protected trust deeds and sequestration.
Some debts are “tricky” because putting them into a debt solution will create issues for a relative, partner, or friend. Joint loans and guarantor loans are two prime examples. Your debt solution will help you, but it will not shield your joint borrower or a guarantor from their liabilities. Money owed to your family or friends is another example. Most debt solutions do not allow any special treatment for this type of debt.
It’s possible that debt management could offer you more flexibility to deal with these difficult types of debt. Without an absolute requirement to include all of your debts, your DMP adviser might assess it to be reasonable to exclude a particular debt from your plan. This should only happen if its in your best interests and the other creditors support the exclusion.
Alternative Debt Management Solutions
In England, Wales, and Northern Ireland:
Debt Relief Order: If you qualify for a DRO you’ll probably find that it’s the cheapest and fastest way to get out of debt. The application fee is just £90 and there’s no further payment to make. To qualify you cannot owe more than £30,000 (£20,000 in Northern Ireland) and must be unable to pay more than £75 (£50 in Northern Ireland) per month towards your debts.
IVA: An individual voluntary arrangement might be suitable if you don’t qualify for a debt relief order, if a DMP will last too long, or if bankruptcy will result in unacceptable consequences. Couples can enter interlocking IVAs together (if it’s an appropriate debt solution). The payment term is often five years with any remaining unpaid debt written-off.
Bankruptcy: Becoming bankrupt might be suitable if you don’t qualify for a debt relief order, debt management will last too long, and if bankruptcy won’t have an unacceptable impact on your assets, employment, or business activities. The application fee in England and Wales is £680.
Debt Arrangement Scheme: This debt solution works similarly to an informal debt management plan in Scotland, but DAS provides you with extra legal protection and guarantees about the suspension of interest and charges. Most residents of Scotland will benefit from using DAS rather than choosing a DMP.
Protected Trust Deed: A Scottish trust deed might be suitable if DAS or a debt management plan will take too long to repay your debts, or if your assets or employment would be unacceptably affected by bankruptcy. The payment term is a minimum of four years with any remaining unpaid debt written-off.
Sequestration (Bankruptcy): Scottish bankruptcy might be suitable if you cannot afford to pay anything towards your debts, if debt management would last too long, if you don’t have assets to protect, and if your employment will not be affected. The application fee is usually £200.
In All of the UK:
Debt Consolidation: Consolidating debt involves taking out a new loan that’s large enough to clear your other debts. Debt consolidation might be suitable if you’re able to reduce your overall payment and interest costs to an affordable amount.
Consolidating debt will not immediately harm your credit rating in the same way as other debt solutions. However, the consolidation of debt can also lead to extra costs and serious risks in the future (especially if the loan is secured upon your home).
We’re a fully authorised direct provider of debt management plans and have been operating this debt solution since 2007. You’ll speak confidentially with a fully-qualified and friendly debt adviser. We’re based in the in the Cardiff area but advise clients throughout all parts of the UK (and expatriates) by telephone and email.