A reader said she was scared about starting a Debt Management Plan (DMP). She was worried her creditors may not freeze interest and might take her to court. Another reader asked if he can get a new mortgage fix if he is in a DMP
I thought it would be useful to look at the most common concerns people have about DMPs.
Setting up a DMP
Will I get lots of phone calls from creditors?
You should stop making your usual payments to your creditors while a DMP is being set up.
This sounds scary – aren’t you going to get a lot of phone calls? You will get some calls, texts or emails in the first month or two.
Just tell them you can’t afford the payments, that your DMP firm will be writing to them and they will be making all payments from here on.
Don’t make a payment yourself! This complicates things and delays moving on to “the new normal” where your DMP firm pays and you don’t.
The creditor may say they can’t see a record of your DMP. That doesn’t mean anything is going wrong or the creditor won’t accept your DMP. It’s just that the DMP hasn’t yet been recorded on all the creditor’s systems yet.
The phone calls really do stop! There are hundreds of thousands of people in Britain happily in DMPs – and they wouldn’t be happy if creditors kept ringing them.
My DMP payment is low – will it be approved by my creditors?
A DMP can’t be vetoed by one or two creditors, there is no vote on it.
Your DMP firm will send each of your creditors your income & expenditure sheet. This shows that you don’t have any spare money to pay them more.
It’s up to each creditor to decide whether to accept the offered monthly payment. They almost always do!
If they say it’s too low, don’t offer them more. Talk to your DMP firm if you are very worried, but this usually gets sorted pretty quickly in the first 2 months. Leave a comment below this article if you have a problem.
Will interest be frozen on all my debts?
Your DMP firm will send your creditors an Income and Expenditure statement, which shows you can’t afford to pay more money than is being offered. S0 most creditors do agree to not add more interest and charges.
The proof of this is the very large number of DMPs that are running. People wouldn’t bother if their debts kept going up!
If unusually a creditor is still adding interest after a while, this is often a mistake by the lender. See What if a creditor won’t freeze interest. That explains how to complain and get this sorted.
At the start of your DMP there is no reason to expect this will be a problem.
I want to keep my overdraft outside my DMP
This isn’t a good idea at all. Including your overdraft in your debt management plan means that the charges will stop.
Overdrafts are some of the hardest types of debt to pay off. And some of the most expensive! Getting a clean start from your debts is one of the main aims of a DMP, and that includes getting rid of your overdraft.
You need to switch to a new bank account. All the major banks all offer good basic bank accounts to people with poor credit records.
And if you have been using your overdraft for most or all day a month for a long while, look at making an affordability complaint. Winning that will speed up your DMP a lot
During a DMP
What is it like living in a DMP?
A DMP is a big change for you. Before you had lots of debts to pay but also credit cards and an overdraft to use. In the DMP you are living on your income each month without borrowing and you only have to make a single debt management payment.
A few people find a DMP very restrictive but many people in practice don’t. Some people find they actually have more money to spend on everyday things without all the debts being paid first. And that they can put money aside for Xmas and car costs.
And if you have been juggling debt repayments for a long while it will be a huge relief to stop. Gradually the anxiety about money and letters from debt collectors fades.
Will my debt be sold to a debt collector?
Possibly after a while. The longer your DMP goes on, the more likely this is. But this doesn’t matter and you don’t have to do anything:
- your DMP firm starts paying the debt collector the same amount instead;
- if interest wasn’t frozen before, it normally is by the debt collector; and
- if later you want to offer a full and final settlement, this is often easier with a debt collector!
So this isn’t something to worry about at all. It’s admin hassle for your DMP firm, not for you.
Will I get CCJs?
Legally a creditor can go to court and get a CCJ even if you keep paying the monthly DMP payment. But this is pretty rare.
The people who are usually taken to court for a CCJ are the ones who aren’t making any payments to their debts. Not the ones who are doing their best by setting up a DMP.
It’s very unusual at the start of a DMP for typical consumer debts such as credit cards, catalogues and loans. The court often sets your CCJ payment at the same level that your DMP payments is … and creditors know this.
The only common exception here is guarantor loans, where the lenders often seem to go to court.
A CCJ is more likely if you have “business” debts, for example if you have given a personal guarantee. Or sometimes if you have had a car repossessed and still owe a very large amount. Talk to your DMP firm if you are worried about this.
If you are worried about charging orders, they are extremely rare, see Is my house safe? for statistics.
What if I can’t afford that DMP payment
DMPs are flexible, so your payment can be changed. You don’t want to do this every month – one of the main advantages of a DMP is that it is stress free and doesn’t need changing often.
So don’t be too optimistic about what you can pay. And say Yes to saving a small amount.
If you have a temporary problem such as your washing machine has died, you can ask for your monthly payments to be suspended or reduced.
Can I overpay the debts in a DMP?
Yes but it’s not a good idea. It will confuse the creditor and StepChange, who have to keep adjusting their system so the balance is correct.
At the start of the DMP, the most important thing for you to do is to build up an emergency fund and savings pots for things like Xmas and car costs.
After you have a good amount of savings, you can either tell StepChange you would like to increase your payment or save up the extra and use that when you have enough to make a settlement offer to a debt.
Credit scores and mortgages
How will it affect my credit score?
See How does a DMP affect your credit score for details.
But if you can’t make the normal monthly payments to your debts because they are too large, there is no alternative that will leave you with a good credit record. See Don’t let credit record worries stop you taking action on your debts for details.
You can make arrangements with your creditors yourself, but these have exactly the same effect on your credit score as a DMP.
What about my partner’s credit score?
Your partner’s credit rating is affected if you have joint accounts with them – a joint bank account, joint loan or mortgage. With no joint accounts, they won’t be affected just because you live in the same house, even if you are married.
Can I get a mortgage afterwards?
Yes. You will need to repay the debts in the DMP, then the exact timing will depend on how long it takes to save a deposit and what your credit record looks like. See Can I get a mortgage after a DMP? for details.
This may sound like it will take a long while, but if you have unmanageable debt, there are no quick routes to buying a house.
Can I get a new mortgage fix when I am in a DMP?
The large majority of mortgage lenders have signed the government’s Mortgage Charter, which says a lender will not make any affordability checks if you only want a new fix (assuming you aren’t in arrears). So here your lender won’t even look at your credit record.
But if you want more than just a new fix from your current lender – from a new lender, or if you want to borrow more money from your current lender – you probably can’t.
Here it is the debt that is the real problem not the DMP. If you don’t start a DMP you probably still won’t be able to remortgage elsewhere.
Is there a better option for you?
If you are having problems repaying your debts, you often don’t have any nice options. If a DMP looks like it will take too long, look at the 7 ways a DMP can be speeded up.
But if you don’t expect your situation to improve in the next few years, you should look seriously at your other alternatives. You may find the following comparisons useful:
One option which isn’t better is muddling through for another year or two and watching your debts carry on increasing…
However worried you are about a DMP now, the problem will be harder when your debts are bigger. Putting off a decision now is likely to be the worst thing you can do.
One big advantage of a debt management plan is its flexibility. If you aren’t sure, you can give a DMP a try and see how well you can cope with that monthly payment.
If you haven’t yet talked to a debt advisor about debt management, give StepChange a ring. They run more DMPs than any other firm, and if a DMP isn’t right for you they can talk about your better alternatives.
More Debt Camel articles:
Stop payments before a DMP starts?
How many DMPs work and how many fail?
Choosing a debt management firm