A Debt Management Plan (DMP) is a method used in various countries for paying personal unsecured debts (which typically are out of control in the sense that payments are late and those due are taking too large a portion of income, or even exceeding it) that involves noting all the debts, assessing income and budget, and re-negotiating interest rates and payments with the lenders, based upon evidence that the result will be a higher likelihood of collection by the lenders due to the debtors more realistic monthly repayment.
How Does A DMP Work?
DMPs are a managed informal arrangement with creditors - whether the debtor uses a free creditor sponsored DMP organisation or a fee-charging DMP company, accepting any terms of a DMP proposal put forward on behalf of the debtor is accepted always at the discretion of the creditors. A good debt advice service recognises this and will only suggest a debtor pays what they can realistically afford after their priority costs (mortgage, utilities, food etc) no matter what. It is likely that creditors will want to review the debtor's situation annually to ensure they are paying as much as they can reasonably afford.
Fee-charging DMP companies will often charge up-front fees as an 'admin' charge, and then will charge a percentage of the surplus that is paid to the creditor as a fee to the debtor. The larger the payment the debtor is encouraged to make, the larger the fee the fee-charging DMP company receives. Also, there is the possibility that a fee-charging DMP company will enter a debtor into this kind of arrangement when it is not in the debtors interest and bankruptcy might be a better alternative, especially if the debtor has large debts and it would take them many years to pay their debts back this way.
The fees charged by DMP companies are usually a percentage of the monthly amount paid, money that could theoretically be going to clear the debt itself if no fees were charged to the debtor. However fee-charging companies usually offer enhanced support and administration services to the debtor throughout the a programme. It is also common for fee-charging companies to employ dedicated "creditor liaison" departments who can negotiate with creditors directly in terms of stopping interest and other charges being added to the debts in question.
What Kind Of Debts In A DMP?
People that use a DMP to eliminate their debt will typically only have unsecured debts such as personal loans, credit cards, bank overdrafts and store cards included in their plan. Secured debts or priority costs, like mortgages, car HP repayments, rent and utilities, are not subject to monthly payment reductions.
When someone participates in a DMP the likelihood that their credit rating will be damaged already is very high. It is not the DMP that affects the credit rating directly, but the inability of the debtor to meet their contractual payments that will be recorded on their credit file - usually in the form of a default notice. Any Court action taken by the creditor is also recorded on credit files.