Debt management plans - what you need to know (2024)

FAQs

Debt management plans - what you need to know? ›

Debt management plans are structured repayment plans to help you repay outstanding debt. In most cases, credit counseling agencies negotiate payment plans on your behalf. It also involves you restructuring your budget to pay off old debt, manage your current finances, and find other ways to become financially secure.

Get debt advice from a debt charity or debt management company before you choose a debt solution. Your provider will let you know if a DMP is right for you. This process is simple and can be done online.

Although you can obtain credit, it is important to know that it will be significantly more difficult to access due to the impact a DMP has on your credit file. This may mean that the options available are high interest options, that could leave you in a challenging position once more.

Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.

This review process is based on a review of five key factors that predict the probability of a borrower defaulting on his debt. Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral.

The 20/10 rule follows the logic that no more than 20% of your annual net income should be spent on consumer debt and no more than 10% of your monthly net income should be used to pay debt repayments.

The cons of Debt Management Plans

Creditors require the accounts to be closed in order to be put on a DMP. This can slightly lower your credit score, because closing multiple accounts at the same time affects the length of your credit history.

Every participating creditor offers their own rates, but in aggregate, the average interest rate for accounts included on a debt management plan with MMI is below 8%.

Debts that cannot be included in a debt management plan (DMP) are those that are considered 'priority debts' such as mortgages and secured loans, student loans, court fines, and child support payments.

Can I keep my bank account with a debt management plan? ›

Your Bank Account & A Debt Management Plan

In conclusion, a Debt Management Plan (DMP) does not directly affect your bank account. You can usually continue using your current bank account as usual when you enter a DMP providing that you do not wish to include a debt on your DMP that is with your bank account provider.

DMP payments tend to be less than what you agreed to repay to your creditor. This means they may not accept the offer. Do not worry if this happens. This can be discouraging, but keep making payments.

How long does a DMP stay on your credit file? Debts will stay on your report for six years, starting from the date they're paid off or defaulted. A DMP means you'll repay your debts more slowly, so your score may be negatively impacted for longer.

Debt collectors cannot harass or abuse you. They cannot swear, threaten to illegally harm you or your property, threaten you with illegal actions, or falsely threaten you with actions they do not intend to take.

Don't provide personal or sensitive financial information

Never give out or confirm personal or sensitive financial information – such as your bank account, credit card, or full Social Security number – unless you know the company or person you are talking with is a real debt collector.

You usually can't include these debts in a DMP - check with the DMP provider. You'll need to choose another debt solution for your priority debts if you can't put them in a DMP. Non-priority debts are less urgent and include things like bank loans, credit cards, student loans, water charges and benefits overpayments.

The “4 Cs” of credit—capacity, collateral, covenants, and character—provide a useful framework for evaluating credit risk.

Hold Debt Service Payments At Less Than 25% to 33% of Gross Income. Use Credit Cards Only As A Convenience. Protect Your Credit. Pay Cash For Purchases. Review Debts Annually.