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What is a Debt Management Plan?

Read our guide to debt management plans to learn about DMPs, how they affect your credit, and how Lowell can work with you if you have a debt management plan.

If you're dealing with problem debt, you may be considering a debt management plan. A debt management plan, or DMP for short, is a type of debt repayment plan which allows you to pay back your debt based on what you can afford.

This can either be set up and managed by an organisation specialising in helping people with problem debt or you can organise it yourself. Please note, for the purpose of this guide, we’re specifically talking about entering into a debt management plan with a DMP provider.

Before you decide to enter into a debt plan, you should know the facts. That’s why we’ve created this guide so that you can learn more and find out how Lowell can work with you if you have a debt management plan.

It's worth noting that debt management plans are not available if you live in Scotland. Instead, there is a similar solution called the Debt Arrangement Scheme (DAS).

This content is intended to be an impartial guide regarding debt management plans and how they work. Lowell Financial Ltd does not offer financial advice. You can find out more about the organisations you can contact in our guide on debt help and support.

How does a debt management plan work?

A debt management plan (DMP) is an informal agreement between you and the people you owe money to, otherwise known as creditors, about your debts. As part of this, you’ll pay one monthly payment, which will be split between your creditors. The debt management plan provider will manage your debt on your behalf and deal with your creditors directly.

If you decide to engage in a debt management plan (DMP), you’ll work with an organisation to review your finances. A debt advisor will listen to your circumstances and help by giving professional advice. They’ll help you to understand your options, and then talk to creditors on your behalf to work out a new payment plan.

Your DMP provider and will look at your finances and work out an affordable payment that works with your budget, to make sure the payment is sustainable. Creditors may also agree to waive fees and lower interest rates, but this is not guaranteed.

Having a debt management plan means that your DMP provider will deal with your creditors. For example, if you decided to work with a DMP provider and one of your debts is owned by Lowell, they would speak to us on your behalf, and we'd work with them to agree on an affordable and reasonable plan based on your circumstances.

If you have multiple debts with multiple companies, a DMP can still work for you. Your debt management provider will contact all the companies you have a debt with on your behalf to help you manage your debt.

Do you have to pay for a DMP?

There are various companies and charitable organisations that can help arrange debt management plans if you're struggling with debt. It’s worth noting that not all providers will offer this service for free, and some may charge a fee for acting on your behalf. If you don’t want to pay for setting up a DMP, be sure to check with a particular provider before agreeing to anything.

If you’re interested in a free debt management plan (also known as a ‘non-profit debt management plan’), National Debtline, StepChange, and Payplan are the three main free DMP providers.

The biggest benefit of a free debt management plan is that any payments you make go directly towards paying off your debt. This means it shouldn’t take as long to clear the debt.

However, this doesn’t mean that it’s necessarily the right option for you and your financial situation. That’s why you should still consider other factors that come with setting up a debt management plan, such as your credit rating being affected and whether your creditors are likely to agree to the plan.

If you’ve already got a DMP set up with a company that charges fees, there is a chance that you could switch to a free DMP provider instead. To check whether this is possible, you’ll need to review your current agreement and what it states about changing providers. 

How long does a DMP last?

The length of your debt management plan really depends on how much debt you have, and how much you are able to pay each month. But because DMPs are flexible informal arrangements, if you have an increase or decrease in income, a new job, or another change in circumstance, you might be able to change how much you pay each month.

What is the minimum debt level for a DMP?

Unlike other debt solutions, there isn’t a minimum debt level that you need to owe in order to enter into a debt management plan (DMP). This is because it is an informal agreement compared to a legally binding debt solution such as an IVA or bankruptcy.

Is Lowell a DMP provider?

While working with us directly allows you to manage a debt that's owned by Lowell with an affordable payment plan, Lowell Financial don't offer debt management plans.

If you decide that a debt management plan might be right for you, your DMP provider will work with Lowell and any other creditors on your behalf to implement the best debt management plan for you.

If you're already working with Lowell and you're struggling to make payments, get in touch to talk to us about it. We know there are often many reasons why a payment might get missed, so it's always best to let us know what's going on. Whatever your situation is, we'll make sure you have the time and space you need to work out the best way forward. We'll make sure you have the help and support you need and work together to figure out a debt repayment plan that is affordable for you.

We’re always here to support you, and if your circumstances change, you can always get in touch with our friendly team who will be considerate of your situation. Once we’ve heard from you, we can look into amending your payment plan and what’s affordable for you depending on your circumstances using our budget calculator.

If you decide to work with a DMP provider and you would like them to manage your debt on your behalf, you don't have to worry about organising it. They'll contact us to agree on an affordable plan, and we'll continue to work with them while your DMP is in place.

What debts can be included in a debt management plan?

Only debts that are classed as ‘non-priority’ can be part of a debt management plan, this includes:

What debts can't be included in a debt management plan?

As we mentioned above, a debt management plan can’t be used to pay off priority debts. This is because these types of debt have more serious consequences if you don’t pay them. Below are some examples of priority debts that aren’t eligible:

  • Council tax
  • TV licence
  • Gas and electricity bills
  • Child support and maintenance
  • Mortgage and rent arrears
  • Secured loans
  • Court fines

If you’re unsure whether a certain debt you have can be included or not, speak to your DMP provider.

Should I get an IVA or DMP?

The choice between a debt management plan and an Individual Voluntary Arrangement (IVA) depends on your circumstances. An IVA is a different kind of debt solution, and an alternative to a DMP. You can find out more about IVAs and other ways to handle debt in our debt solutions guide.

IVAs are a more formal debt solution, and usually involve committing to paying off your debt plan within a five-year time frame. With this, you commit to making payments to your creditors, like you would in a DMP, but an IVA is legally binding, and at the end, any outstanding debt may be written off.

The requirements for entering into an IVA are stricter than those for a DMP. You should also be aware that arranging an IVA can come with fees, but these fees will be included in your monthly repayments, and you don't have to pay them upfront. For more information, you can read our guide on IVAs which goes into a lot more detail.

Before you go ahead with any type of debt solution, make sure that you get free, independent advice from organisations like StepChange or National Debtline.

Can you change from a DMP to an IVA?

If you’ve already started the process of setting up a DMP but your circumstances have changed then you should contact your DMP provider. They will then take the steps to review your situation again and give you updated guidance which may be getting an IVA instead.

Can you pay off a debt management plan early?

Yes, it is possible to pay off a debt management plan early, but this will depend on your individual circumstances. This is because you’ll need to either increase your monthly payments, pay a lump sum, or have your creditors agree to a full and final settlement.

If you’re wondering whether you might be able to pay off your plan earlier than planned, you can speak to your DMP advisor. 

Advantages of a DMP

  • Any debts included in the DMP will be cleared once you finish the plan
  • You only need to make one regular monthly payment
  • Your DMP provider will handle communication with the necessary creditors
  • In certain cases, creditors may agree to freezing interest and charges on your debt
  • Due to the reduced monthly payments, you’re able to pay off your debts in a more affordable way

Disadvantages of a DMP

  • Your debts will still need to be repaid in full and won’t be written off
  • Creditors can refuse to deal with a DMP provider
  • Some types of debt, including priority or secured debts, can’t be paid through a DMP
  • Unlike other formal debt solutions, you won’t have legal protection from creditors
  • A DMP could negatively impact your credit score
  • They can last longer compared to other debt solutions

Does a debt management plan affect your credit?

Being on a debt management plan could affect your credit file, credit score, and your ability to obtain future credit. However, this is dependent upon your own circumstances.

For more information about this, we have a helpful guide to explain how your credit file affects you in our Lowell debt guidance section.

If you're on a debt management plan, it might be that your monthly payment on the DMP is less than the amount you originally agreed to pay with your creditor. If this is the case, your credit file will show 'partial payments,' which could lower your credit score.

Most creditors will add a flag to your credit report to let potential lenders know you’ve entered a DMP to manage your debt. It's worth pointing out that making reduced payments through a debt management plan may still look better in the future to a potential lender than the alternative of many missed payments.

Whether you're working with Lowell directly on a payment plan or managing your debt through a DMP, making regular payments - even if they are partial payments - helps to show that you're taking responsibility for your debt and taking action to clear it. 

How long does a debt management plan affect your credit rating?

Details of defaults and partial payments will be recorded on your credit file for six years from the date they happened. After six years, they will be removed from your credit file, even if the debt that they relate to hasn't been fully repaid.

It’s worth noting that DMPs aren’t recorded as a separate entry on your credit file, instead, your creditors will add a DMP ‘flag’ to the relevant account entries.

Once your debt management plan is complete and your debts are fully paid, you can start working to improve your credit score. Read our useful blog post on how to improve your credit score to get some tips and advice on where to start.

Can I get a loan while on a DMP?

As we’ve mentioned, entering into a debt management plan will be noted on your credit file and could make lending more difficult. Potential lenders can see this information and will be reluctant to lend to you, as they’ll see you as high-risk and assume you’re unlikely to repay the loan.

This doesn’t mean it’s impossible, but it’s also worth considering whether getting a loan while on a DMP is a good idea in the first place. If you’re unable to keep up with your current debt payments, it’s unlikely that you can afford to take on any further credit.

Can I get a credit card while on a debt management plan?

It may be possible for you to get a credit card while on a debt management plan. Some lenders will take into consideration the fact that you’re paying your creditors through a debt management plan, but it could be more difficult to be accepted, or you might not be able to access better interest rates.

Depending on your circumstances, it may not be advisable to get a credit card while on a debt management plan. If you’re thinking about doing so, there are various independent organisations that you can speak to for debt advice such as National Debtline.

Can you get a mortgage while on a debt management plan?

Technically, yes, you can get a mortgage with a debt management plan. However, an active DMP could affect your application for a new mortgage because, like with other forms of credit, mortgage lenders will likely view you as a risk.

This means that they’ll likely refuse your application altogether or offer you a worse deal by charging higher interest. Therefore, you might find it best to wait until you complete your DMP before getting a mortgage.

If you’re unsure what to do, you can get free expert mortgage advice from organisations like StepChange.

How long after a DMP can I get a mortgage?

There is no set period when it comes to how long it takes to get a mortgage after your DMP has ended, this will vary from person to person. Generally speaking, after you finish your DMP, your credit file should start to improve over time, and you might find it easier to get a better deal on a mortgage.

It’s also important to remember that a DMP isn’t the only factor that could affect your mortgage application, which is something we discuss further in our guide on debt and getting a mortgage.

What happens at the end of a debt management plan?

Once your DMP ends, you’ll be able to close the accounts that are fully paid off. Depending on when you completed your DMP, the debts included in your plan could still appear on your credit file for up to six years. However, the DMP ‘flag’ will be removed from these entries.

If you have a debt management plan and you feel you're struggling, speak to your DMP provider. They can offer advice and support to help you if you're going through a difficult time.

If you’re a customer of Lowell and don’t think that you’re on the best debt repayment plan for you, please do get in touch with our friendly team who will be more than happy to work with you to find a solution.

Debt management plans can be a solution to address problem debt, but make sure that you get independent help and advice before you enter into one. If you're working with Lowell and decide to use a debt management plan, we will always work with your plan provider to agree on an affordable and fair plan for you. You can find more information about debt and working with Lowell in our debt guidance section.

 

First published: 24th April, 2021

Last updated: 11th June 2024