A Debt Management Plan (DMP)
is a method used for paying personal unsecured debts 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.
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.
Fee-charging Debt Management Plan 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 Debt Management Plan 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 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.
People that use a Debt Management Plan 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 Debt Management Plan 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.
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