Discovering Debt Relief by a Personal Debt Management Plan
Debt Management Plans (DMPs) are much in news reports at present. Certain adverse issues with the sector made the biggest headlines. As with any industry a few bad apples can give the barrel a bad name. In Britain the Office of Fair Trading (OFT) has already taken actions to handle the bad apples. Quite possibly the most significant infractions it has discovered took place in the areas of marketing and charging behavior. In September 2010 it issued a warning to 129 debt management companies and followed that up with high profile enforcement measures against the worst offenders. The OFT intends to release revised debt management direction in June 2011. It is not clear at this point if the government plans to introduce any legislation to manage DMPs. Yet the Ministry of Justice has released a consultation document concerning the future of DMPs. Three types of regulation are being offered. These are to marginally improve regulation by the OFT, to introduce sector self control with voluntary codes of practice and/or to create a new solution i.e. a statutory DMP. Since the DMP is the predominant personal insolvency solution in the UK at the present time, it is perplexing that the government seems to shrink from the duty of legislating in this area. So what is the current condition of national debt management advice and how can it bring relief to debtors?
A DMP is an simple flexible process of dealing with an individual debt issue by which lenders are repaid in whole over a period of time. The rate at which creditors are paid off will depend on what the person can afford and as a result a DMP can last for many years. You can actually manage your own DMP by engaging directly with your lenders. These self administered DMPs are sometimes called SA DMPs or DIY DMPs. However, the majority of people who end up in a DMP do so with third party assistance, and use the assistance of a professional debt management company or one of a variety of not for profit organisations. These include the CCCS and Payplan and indeed CAB who can offer invaluable free advice and guidance.
Why should the financially stressed debtor utilize a third party professional to help arrange a DMP with creditors? There are two principal reasons for this. To begin with, debtors can be uncomfortable in seeking to deal with their creditors directly. Additionally, lenders themselves usually prefer to deal with a service provider who understands the need for efficiency and proper structures in managing a DMP but without the (understandable) sentiment and personal upset which working directly with a distressed consumer may involve. The knowledge and experience built up by service providers, in dealing with creditors during many years, offers debtors a degree of peace of mind and confidence that their DMP will be managed efficiently and with the minimum of stress and unwanted communications from lenders.
Are you able to secure new credit while in a DMP? Since it is an informal process, you cannot be stopped from obtaining further credit when participating in a DMP. Nevertheless, it is against the spirit of the plan that you should do this and lenders who have approved your DMP to begin with may and probably will certainly reject it should they find out that you have broken the spirit of the deal in this way. This is because you made a commitment to use all of your disposable income to repaying your present debts when you went into the DMP.
What debts are covered by a DMP? All unsecured debts such as loans, credit cards, store cards and bank overdrafts are covered. Your secured debts such as your mortgage or HP agreements are prioritized in your income and expenditure calculations, so that you do not fall behind on these payments.
What are the advantages of a DMP? Lenders in general give preference to debt management to other systems for solving financial difficulties considering that in due course you will repay your entire debts. From the debtor’s point of view, there is no need to release value from property, you pay whatever you can afford, your DMP is put together to suit your particular conditions and requirements and your information and facts aren’t going to be put on the Insolvency Register.
How much does a DMP cost? It depends on who you use since debt management fees vary from one provider to the next. It may pay to shop around before you select your provider. Most DMP service providers charge a set up fee equal to the debtor’s first monthly payment into the DMP. This means that creditors receive nothing during the first month the DMP is running. Thereafter, charges are usually a fixed percentage of the monthly payment made by the debtor. The average monthly charge is 15% with a minimum of around 25 and a maximum of around 100. As you shop around, you will find that charges vary. For example, if you enter a DMP and agree to make monthly payments of 300, your DMP provider retains the first payment of 300 in respect of set up fees and thereafter it charges 45 per month. It distributes the remaining 255 to your creditors on a pro-rata basis.
What’s the effect of entering a DMP on the debtor’s credit score? The fact is that the credit standing may possibly already be damaged if the debtor has arrears of payments or a track record of missed payments or overdue repayments. The debt management provider negotiates lowered monthly installments with creditors, and therefore the primary contracts will be broken. Non-payments are likely to be recorded on the debtor’s credit reports and credit reference agencies preserve such information for a minimum of six years.
Does a person need to be insolvent to go into a DMP? No, it isn’t a necessity to be insolvent. It might be that the debtor’s income combined with any property they may have is ample to pay off all financial obligations completely in accordance with the conditions under which the funds were borrowed. Even so, the borrower might be unwilling to do some unpalatable things to repay the debts. By way of example, there could be a sufficient amount of value in the debtor’s property to repay the financial obligations when combined with the debtor’s income. It could require selling the family home to release the value if the borrower just cannot get a remortgage or if the conditions of a sub-prime remortgage are too high. A DMP could possibly offer a means of postponing the selling of the family home or allowing the borrower some respite until such time as a remortgage can be arranged on affordable terms.
Will creditors accept the debtor’s offer of payment in a DMP? There are many DMP service providers who long experience of negotiating with creditors and who have a track record of getting offers accepted. However, creditors do not have to accept reduced payments or freeze interest and charges and there is no guarantee that any existing or threatened legal action or proceeding will be suspended or withdrawn. Furthermore, any debt collection cost incurred by a creditor is normally be added to the debt. The DMP provider keeps the debtor informed regarding the status and progress of negotiations on reduced payments.
Must a debtor have to be in work to undergo a DMP? No, yet it is essential to have a form of income that is more than what is essential for living expenses. Most people who end up in a DMP are employed. However, consumers who have just recently become laid-off and who are currently searching for work can certainly think about offering their lenders a short term DMP, in particular when they have strong prospects of getting a position that has a reasonable level of disposable income. Although people whose whole income is composed of benefits may offer a DMP to their lenders, the level of disposable income is likely to be very low and it may be that an alternative choice such as bankruptcy or maybe a Debt Relief Order may well be a more effective and ideal choice.
Are employers advised concerning their employees entering a DMP? Respected DMP companies offer complete confidentiality and privacy regarding the monetary affairs of debtors. No facts with regard to the consumer is disclosed to any outside companies or other individuals like the debtor’s employer. Special care is taken when making contact with the borrower to make sure other individuals will not discover the debtor’s situation. Of course the debtor really should act prudently in communications with creditors and with any other advisors to be sure that the DMP is not unintentionally disclosed to the employer.
How long does a DMP last? That really depends on the debtor’s personal circumstances. However, the DMP provider should be able to estimate how long the plan is likely to last, once it has received all of the debtor’s personal information and in particular the amount of the debts and the debtor’s disposable income. Since all of the debts are to be paid off in full, the term of the DMP could be quite long.
Does the debtor need to open a new bank account when entering a DMP? Yes, almost certainly. Most people nowadays have their wages/salary/benefits paid into a bank or building society with which they also have debts – such as an overdraft, credit card or loan. This can be quite messy when the DMP commences, since the existing bank or building society may seek to use all of the debtor’s wages/salary/benefits to address the deficits in the debtor’s accounts with them, to the disadvantage of the debtor’s other creditors. So, it is best to open a new bank account with a bank or building society that is not connected to your existing bank. The debtor needs to ensure that wages/salary/benefits are paid into the new account and that priority payments (mortgage, rent, council tax, car HP etc) are made from the new account also. Any direct debits with the debtor’s existing bank need to be cancelled in writing and relevant creditors informed. These steps should ensure that the debtor remains in control of his or her income and that all creditors are treated equally and on a fair and equitable basis.
What happens if the debtor’s circumstances change while in a DMP? Since a DMP is flexible and informal, it is not as strict as other systems. The DMP company will most likely have allocated a contact or liaison officer with individual responsibility for the debtor’s DMP. The consumer should be aware of who that contact individual is and keep them entirely cognizant of their situation at all times, particularly in regards to any direct correspondence with or contact from lenders or any changes to income and expenditure. The DMP company will need to then get hold of creditors and explain any issues that develop as a result of such altered circumstances and propose suggestions that meet the needs of the debtor and creditors.
What are the alternatives to a DMP? There are many alternative courses of action open to anyone in financial difficulty who is seeking relief. The debtor should be aware of all available options before deciding which way to go. Some of the most common alternatives are Bankruptcy, Individual Voluntary Arrangement, Debt Relief Order, Debt Consolidation, Asset Sale & Debt Settlement and Property Remortgage & Debt Settlement. It may even be that financial assistance is available from a member of the debtor’s family or friends.
Looking for legitimate debt relief ? Get inside information on how and where to find the best now in our overview of all you need to know about Debt management plans.
