Debt Management Plan Pros and Cons

A Debt Management Plan (DMP), similarly to many other solutions, has its advantages and disadvantages. Generally though, they may be liked for their flexibility and the ability to effectively condense your debts into one affordable payment per month. However, as a non-legally binding option, it doesn’t protect your assets or guarantee a freeze on interest rates or charges.

To help you decide if a Debt Management Plan is right for you, we’ve detailed the pros and cons here:

Debt management plan pros

When considering the Debt Management Plan pros and cons, there are several benefits:

An end to creditor contact

Your creditors should cease making demands for money as you’ve organised a repayment plan with them. The Debt Management company should present a DMP proposal to creditors on your behalf. Assuming your creditors are content with the arrangement and agree to accept, they should cease most – if not all – of their communications.

Make one payment towards your debts each month

Putting all your debts into one affordable monthly payment should make them much easier to manage. If your creditors agree to the plan, you won’t need to juggle multiple repayments to organisations – just concentrate on making one.

More flexible than other plans

One benefit of the Debt Management Plan, being an informal arrangement, is that it’s more flexible than other solutions. This means, should your situation change – such as if you unexpectedly lost a source of income – you may be able to alter the plan to suit your needs.

Not a form of insolvency

Formal insolvency solutions do have a few repercussions. For example, if you were rendered bankrupt, your name would be added onto a public database called the Insolvency Register. Furthermore, you’d be prevented from applying or working in certain occupations. As a Debt Management Plan is an informal solution, you wouldn’t need to worry about any of these issues.

Debt Management Plan cons

However, there are also negatives which you should be aware of:

A Debt Management Plan isn’t legally binding

A Debt Management Plan isn’t legally binding. Although this does give you some extra flexibility, this also means the solution isn’t legally protected. This means creditors could still involve the courts to reclaim what’s owed.

Creditors aren’t obliged to agree to the plan

Creditors don’t have to follow the Debt Management Plan. They also don’t need to agree to it when the DMP is presented to them. Ultimately, this means the arrangement can be cancelled at any time – opening you up to possible bankruptcy.

Interest rates and charges may not be frozen

Some debt solutions will allow you to freeze interest rates and charges. With a Debt Management Plan, you can request creditors do this but they aren’t obligated to do so. This means your debt might continue to increase.

A Debt Management Plan can last a long time

This agreement will end when your lenders have been repaid. Depending on your situation, and the size of the repayments, this means Debt Management Plans can last a very long time. For example, it isn’t unheard of for these to continue for ten years or more.

How does it compare to other debt solutions?

A Debt Management Plan is an informal solution and differs quite drastically when compared to formal alternatives. For example, with an IVA:

• It’s a legally binding agreement which creditors must follow.
• Interest rates and charges are frozen.
• Lasts for around five years. After that, any remaining unsecured debt is written off.