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What is a Debt Management Plan?
Updated: Thursday, 27 July 2023
Mortgages, car finance payments, and other bills can sometimes get too much. For some people seriously struggling with outstanding arrears, a debt management plan (DMP) can help to make debts more manageable by reducing monthly payments.
To put it simply, a DMP is an informal agreement between you and any creditors you owe non-priority debts, like credit cards, store cards, and loans, that will make repaying this debt more manageable. A debt management company or charity will typically manage the DMP.
In this article, we’ll explore what a DMP is, why it matters to you, and how it could affect your ability to get credit.
Who is eligible for a debt management plan?
Eligibility for a DMP will depend on your income and the debt you owe.
To qualify for a DMP, you must:
- Have enough disposable income to make your monthly payments. This is the money you have left over after paying for your living expenses, like rent, energy bills, and food
- Be able to make large enough payments to clear your debts in a reasonable timescale, and your creditors will also have to agree on this amount
- Have enough disposable income to make the agreed monthly payments, but not enough to repay the debts in a six-month period.
How does a debt management plan work?
Debt management plans can be put in place to help you pay off your debt. They’re usually set up by third-party organisations or charities such as StepChange, who can work with you to figure out a budget that meets the needs of you and your household.
The debt management plan will first discover how much you can afford to pay towards your debts once you’ve made all your essential payments. If there is any money left over, this will be shared fairly between each creditor.
When using a debt management organisation to set up a DMP, they’ll often contact your creditors for you to set up new payment amounts. Then, you’ll likely make the arranged payments to the DMP organisation or charity each month, and they’ll pass on the payments to the creditors.
How long does a debt management plan last?
How long a debt management plan lasts will depend on a couple of factors, mainly the total amount of your debts and your disposable income. It isn’t unusual for DMPs to last up to 10 years. However, if you only have small quantities of debt, then you can expect this period to be much shorter.
What debts can go on a debt management plan?
Only non-priority debts can be included in a DMP. To give you a better idea of what can and can’t be included in a DMP, take a look at the examples below:
Priority debts that cannot be included in a DMP:
- Mortgage arrears
- Rent arrears
- Council tax arrears
- TV licence
- Child maintenance payments
- Income tax
- VAT
- Court fines
- Utility bills
- Car finance.
Non-priority debts that can be included in a DMP:
- Personal loans
- Loans from a bank or building society
- Credit card, store card debts
- Payday loans
- Catalogue, home credit, or in-store credit debts
- Benefits overpayments
- Overdrafts.
Does a debt management plan affect my credit score?
A DMP will usually lower your credit score, as having one is an indication to potential lenders that you’re having difficulty repaying your debts, so you might be viewed as a higher risk. This could affect your ability to get credit in the future, including car finance and mortgage applications.
If you want to know whether you can get car finance on a debt management plan, you might need to use a specialist lender such as Moneybarn, who specialise in bad credit car finance.
Representative 30.5% APR.
The point of a debt management plan is to control spending to ensure you can repay your outstanding debts. If you want to purchase a car while in a DMP, you will need to speak with your DMP provider. This is to ensure the car is a necessity, and whether it would be affordable for your circumstances.
How long does a debt management plan stay on your credit file?
Your DMP will stay on your credit file for six years, as is usually the case with defaulted payments. But having a DMP on your credit report isn’t a completely negative thing – it can reassure anyone looking at your report that you are making your repayments, just at a reduced rate.
Unless your debt repayments continue for longer than six years, the DMP marker will be removed from your credit file.
Will a debt management plan affect my spouse or partner?
The only way a DMP would affect your spouse or partner is if shared financial responsibilities have been affected. Joint debts or bills that are included in a DMP will affect both parties in the same way.
What happens if I miss a payment on my debt management plan?
If you miss a payment whilst on a DMP, you should contact the organiser as soon as possible, ideally before. Missing your payments could put your DMP at risk of cancellation.
Letting the DMP provider know that you can’t make your payment will allow them to reach out to your creditors and possibly negotiate a solution.
How can I improve my credit score after a debt management plan?
Once your DMP has ended, it is completely possible to build your credit rating back up to a healthy score over time.
The first step is to check your credit report with each of the three credit reference agencies. These are Experian, Equifax, and TransUnion. You might want to check all three of them because they each have their own credit score ranges. That way, you can see if you have a good credit score, and if you don’t, you can take steps to improve it.
One of the main ways to improve your credit score is to continue to make any repayments on time and in full, which you should hopefully have more capacity to do once your DMP has been completed.
You can also check your credit reports and make sure that all the information is up to date. If you spot any errors, you can contact the credit reference agency to get them resolved.
Is a debt management plan right for me?
There are multiple solutions for managing debt, a DMP is just one. For some people, a DMP is a viable option for getting back on track with their finances.
Some of the pros and cons of a DMP include:
Pros of a DMP
- Many DMPs are free to arrange. This can allow all your spare money to go toward paying off your debts
- You usually only make one monthly payment for your debts during a DMP. This goes to the DMP provider, who then makes the payments to your creditors. This prevents multiple monthly payments from coming out of your accounts, which can often be confusing
- DMPs are not legally binding, so you can leave the agreement at any time if you find a more suitable option
- They are adaptable to suit your situation and any unexpected changes.
Cons of a DMP
- A DMP will mean that it takes longer to repay your debts as you’ll be making reduced payments
- A DMP can negatively affect your credit score
- Some providers may charge a fee to arrange and manage a DMP
- Not all debts are included, only non-priority debts as explained above
- Not all creditors have to agree to a DMP, so they could still pass your debt to a debt collection agency.
How to apply for a debt management plan
Many free debt advice organisations can help you decide if a DMP is right for you.
We can’t give debt advice, but there are some not-for-profit organisations that could help. These include:
- StepChange, a debt charity who can provide free, impartial advice
- MoneyHelper, who provide free online tools to help manage your money
- Citizens Advice, who offer online, over the phone, and in person support
If a debt management plan is recommended, the organisation will then work with you to find the best solution for your circumstances.
FAQs about debt management plans
Are debt management plans legally binding?
DMPs are not legally binding. Although they are regulated and authorised by the Financial Conduct Agency (FCA), you are not tied to an agreement and can leave at any point.
Can creditors refuse a debt management plan?
A creditor can refuse to negotiate with a DMP provider to reduce your monthly repayments. In this case, they can still take action to recover the money you owe, which could involve going to court.
Mortgages, car finance payments, and other bills can sometimes get too much. For some people seriously struggling with outstanding arrears, a debt management plan (DMP) can help to make debts more manageable by reducing monthly payments.
To put it simply, a DMP is an informal agreement between you and any creditors you owe non-priority debts, like credit cards, store cards, and loans, that will make repaying this debt more manageable. A debt management company or charity will typically manage the DMP.
In this article, we’ll explore what a DMP is, why it matters to you, and how it could affect your ability to get credit.
Who is eligible for a debt management plan?
Eligibility for a DMP will depend on your income and the debt you owe.
To qualify for a DMP, you must:
- Have enough disposable income to make your monthly payments. This is the money you have left over after paying for your living expenses, like rent, energy bills, and food
- Be able to make large enough payments to clear your debts in a reasonable timescale, and your creditors will also have to agree on this amount
- Have enough disposable income to make the agreed monthly payments, but not enough to repay the debts in a six-month period.
How does a debt management plan work?
Debt management plans can be put in place to help you pay off your debt. They’re usually set up by third-party organisations or charities such as StepChange, who can work with you to figure out a budget that meets the needs of you and your household.
The debt management plan will first discover how much you can afford to pay towards your debts once you’ve made all your essential payments. If there is any money left over, this will be shared fairly between each creditor.
When using a debt management organisation to set up a DMP, they’ll often contact your creditors for you to set up new payment amounts. Then, you’ll likely make the arranged payments to the DMP organisation or charity each month, and they’ll pass on the payments to the creditors.
How long does a debt management plan last?
How long a debt management plan lasts will depend on a couple of factors, mainly the total amount of your debts and your disposable income. It isn’t unusual for DMPs to last up to 10 years. However, if you only have small quantities of debt, then you can expect this period to be much shorter.
What debts can go on a debt management plan?
Only non-priority debts can be included in a DMP. To give you a better idea of what can and can’t be included in a DMP, take a look at the examples below:
Priority debts that cannot be included in a DMP:
- Mortgage arrears
- Rent arrears
- Council tax arrears
- TV licence
- Child maintenance payments
- Income tax
- VAT
- Court fines
- Utility bills
- Car finance.
Non-priority debts that can be included in a DMP:
- Personal loans
- Loans from a bank or building society
- Credit card, store card debts
- Payday loans
- Catalogue, home credit, or in-store credit debts
- Benefits overpayments
- Overdrafts.
Does a debt management plan affect my credit score?
A DMP will usually lower your credit score, as having one is an indication to potential lenders that you’re having difficulty repaying your debts, so you might be viewed as a higher risk. This could affect your ability to get credit in the future, including car finance and mortgage applications.
If you want to know whether you can get car finance on a debt management plan, you might need to use a specialist lender such as Moneybarn, who specialise in bad credit car finance.
Representative 30.5% APR.
The point of a debt management plan is to control spending to ensure you can repay your outstanding debts. If you want to purchase a car while in a DMP, you will need to speak with your DMP provider. This is to ensure the car is a necessity, and whether it would be affordable for your circumstances.
How long does a debt management plan stay on your credit file?
Your DMP will stay on your credit file for six years, as is usually the case with defaulted payments. But having a DMP on your credit report isn’t a completely negative thing – it can reassure anyone looking at your report that you are making your repayments, just at a reduced rate.
Unless your debt repayments continue for longer than six years, the DMP marker will be removed from your credit file.
Will a debt management plan affect my spouse or partner?
The only way a DMP would affect your spouse or partner is if shared financial responsibilities have been affected. Joint debts or bills that are included in a DMP will affect both parties in the same way.
What happens if I miss a payment on my debt management plan?
If you miss a payment whilst on a DMP, you should contact the organiser as soon as possible, ideally before. Missing your payments could put your DMP at risk of cancellation.
Letting the DMP provider know that you can’t make your payment will allow them to reach out to your creditors and possibly negotiate a solution.
How can I improve my credit score after a debt management plan?
Once your DMP has ended, it is completely possible to build your credit rating back up to a healthy score over time.
The first step is to check your credit report with each of the three credit reference agencies. These are Experian, Equifax, and TransUnion. You might want to check all three of them because they each have their own credit score ranges. That way, you can see if you have a good credit score, and if you don’t, you can take steps to improve it.
One of the main ways to improve your credit score is to continue to make any repayments on time and in full, which you should hopefully have more capacity to do once your DMP has been completed.
You can also check your credit reports and make sure that all the information is up to date. If you spot any errors, you can contact the credit reference agency to get them resolved.
Is a debt management plan right for me?
There are multiple solutions for managing debt, a DMP is just one. For some people, a DMP is a viable option for getting back on track with their finances.
Some of the pros and cons of a DMP include:
Pros of a DMP
- Many DMPs are free to arrange. This can allow all your spare money to go toward paying off your debts
- You usually only make one monthly payment for your debts during a DMP. This goes to the DMP provider, who then makes the payments to your creditors. This prevents multiple monthly payments from coming out of your accounts, which can often be confusing
- DMPs are not legally binding, so you can leave the agreement at any time if you find a more suitable option
- They are adaptable to suit your situation and any unexpected changes.
Cons of a DMP
- A DMP will mean that it takes longer to repay your debts as you’ll be making reduced payments
- A DMP can negatively affect your credit score
- Some providers may charge a fee to arrange and manage a DMP
- Not all debts are included, only non-priority debts as explained above
- Not all creditors have to agree to a DMP, so they could still pass your debt to a debt collection agency.
How to apply for a debt management plan
Many free debt advice organisations can help you decide if a DMP is right for you.
We can’t give debt advice, but there are some not-for-profit organisations that could help. These include:
- StepChange, a debt charity who can provide free, impartial advice
- MoneyHelper, who provide free online tools to help manage your money
- Citizens Advice, who offer online, over the phone, and in person support
If a debt management plan is recommended, the organisation will then work with you to find the best solution for your circumstances.
FAQs about debt management plans
Are debt management plans legally binding?
DMPs are not legally binding. Although they are regulated and authorised by the Financial Conduct Agency (FCA), you are not tied to an agreement and can leave at any point.
Can creditors refuse a debt management plan?
A creditor can refuse to negotiate with a DMP provider to reduce your monthly repayments. In this case, they can still take action to recover the money you owe, which could involve going to court.
For a better road ahead
Moneybarn is a member of the Finance and Leasing Association, the official trade organisation of the motor finance industry. The FLA promotes best practice in the motor finance industry for lending and leasing to consumers and businesses.
Moneybarn is the trading style of Moneybarn No. 1 Limited, a company registered in England and Wales with company number 04496573, and Moneybarn Limited, a company registered in England and Wales with company number 02766324. The registered address for these companies is: Athena House, Bedford Road, Petersfield, Hampshire, GU32 3LJ.
Moneybarn’s VAT registration number is 180 5559 52.
Moneybarn Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702781)
Moneybarn No. 1 Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702780)
