Debt management plans - what you need to know
If you're struggling to keep up with debt payments on things like credit cards, loans and store cards, a debt management plan (DMP) may be right for you.
In Scotland, a debt payment programme under the Debt Arrangement Scheme may be a better option.
This page explains what a DMP is, how it works and what you need to think about before getting one.
What are priority and non-priority debts?
Priority debts include:
- mortgage or rent arrears
- gas and electricity arrears
- council tax or rates arrears
- magistrates' court fines
- arrears of maintenance payable to an ex-partner or children
- income tax or VAT arrears
- TV licence or TV licence arrears.
They're called priority debts because the consequences of not paying them can be more serious than for other debts. You can't include these debts in a DMP so you need to make sure you've got a way to deal with your priority debts before you set up a DMP.
Non-priority debts are less urgent and include things like bank loans, credit cards, student loans, water charges and benefits overpayments.
What is a DMP?
A DMP is an informal agreement between you and your creditors for paying back your non-priority debts. Non-priority debts are things like credit cards, loans and store cards.
You pay back the debt by one set monthly payment, which is divided between your creditors.
Most DMPs are managed by a DMP provider who deals with your creditors for you. This means you don't need to deal with your creditors yourself.
A DMP is not legally binding, meaning you're not tied in for a minimum period and can cancel it at any time.
Is a DMP right for you?
A DMP may be a good option if the following apply to you:
- you can afford the monthly repayments on your priority debts (such as mortgage, rent and council tax) and your living costs, but are struggling to keep up with your credit cards and loans
- you’d like someone to deal with your creditors for you
- making one set monthly payment will help you to budget.
However, you need to be sure you understand the impact a DMP will have:
- it may take longer to pay back your debt because you'll be paying less each month
- your creditors won’t necessarily freeze the interest and charges on your debts, so the amount you owe might go down by less than you think
- your DMP provider might charge you a fee, although there are several free providers you can use so there’s no need to pay if you don’t want to
- your creditors might refuse to co-operate or continue to contact you
- the DMP may show on your credit record, making it harder for you to get credit in the future.
If you’re unsure about whether this sounds like it’s right for you, you might want to think about other options for dealing with your debts.
Joint debts and DMPs
If you have a debt in joint names with someone else, this can be included in your DMP. However, your creditors may still chase the other person for all of the debt. This is because whenever you take out a credit agreement, such as a loan or bank account, with another person, you're both liable for the full amount of the debt. This is known as joint and several liability.
If both you and your partner are struggling with debts, you might want to consider setting up a joint DMP where you'd both be equally responsible for the repayment plan. It doesn't matter if you have different levels of income or debts. You can also include debts that are only in one name in a joint DMP.
How to get a DMP
If you’ve decided a DMP is right for you, you’ll need to follow these steps to set one up:
- make sure you've sorted out your priority debts first
- work out your budget to see if you have enough available income to make your monthly payment
- choose a DMP provider, remembering that you can choose a free provider
- check the agreement or contract carefully.
Debt Arrangement Scheme in Scotland
A Debt Arrangement Scheme (DAS) has been set up by the Scottish Government to help people manage their debts by paying into a debt payment programme (DPP). This is a form of DMP and is strictly regulated. You can’t apply directly for a DPP. An approved money adviser must make the application on your behalf. You can find more about DPPs and how to find an approved money adviser on the Debt Arrangement Scheme page on the Accountant in Bankruptcy website.
- How to set up a DMP
- Should you pay for a DMP?
- Impact a DMP will have on your credit rating
- How to work out your budget