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 troubled debtor use a third party service provider to help set up a DMP with creditors? There are two main reasons for this. Firstly, debtors are often uncomfortable in trying to deal with their creditors directly. Secondly, creditors themselves often prefer to deal with a service provider who understands the need for efficiency and proper structures in managing a DMP without the (understandable) emotion and personal upset that dealing directly with a distressed debtor may involve. The knowledge and experience built up by service providers, in dealing with creditors over many years, offers debtors a degree of assurance and confidence that their DMP will be managed smoothly and with the minimum of hassle and unwanted communications from creditors.
Can you obtain new credit while in a DMP? Because it is an informal process, you cannot be prevented from obtaining further credit while in a DMP. However, it is against the spirit of the plan that you should do this and creditors who may have agreed to your DMP in the first place may and probably will certainly reject it if they learn that you have broken the spirit of the agreement in this way. This is because you made a commitment to use all of your disposable income to repaying your existing debts when you entered the DMP.
Exactly what debts are covered by a DMP? All unsecured debts which includes loans, credit cards, store cards and bank overdrafts are covered. Your secured debts for example your mortgage or HP agreements are prioritized in your income and expenditure calculations, so that you do not go delinquent on these repayments.
What are the advantages of a DMP? Creditors generally prefer debt management to other processes for resolving financial difficulties because in due course you will repay all of your debts. From the debtor’s point of view, you do not have to release equity from property, you only pay what you can afford, your DMP is designed to suit your personal circumstances and needs and your details will not be put on the Insolvency Register.
How much should a DMP cost? All depends on who you work with since debt management charges vary from one company to the next. It may pay to shop around before you decide to opt for your provider. Most DMP service providers charge a set up fee equal to the debtor’s first monthly instalment into the DMP. As a result creditors get nothing during the first month the DMP is running. Thereafter, fees are generally a fixed portion of the monthly instalment made by the borrower. The average monthly fee is in the region of 15% with a minimum of around 25 and a maximum of about 100. Whilst you research rates, you will find that fees vary. To illustrate, if you enter a DMP and consent to make monthly payments of 300, your DMP provider retains the initial payment of 300 in respect of set up fees and then it charges 45 per month. It distributes the remaining 255 to your creditors on a pro-rata basis.
What is the effect of entering into a DMP on the debtor’s consumer credit rating? The truth is that the credit ranking may possibly already be impacted if the borrower has arrears of repayments or a history of missed payments or late repayments. The debt management company negotiates decreased monthly payments with lenders, and the initial agreements will end up being broken. Non-payments are likely to be recorded on the debtor’s credit profile and credit reference companies preserve such records for no less than six years.
Does a borrower have to be insolvent to go into a DMP? No, it isn’t a must to be insolvent. It may be that the debtor’s income combined with any assets they might have is sufficient to repay all debts in full in accordance with the conditions under which the funds were taken out. However, the debtor could possibly be unwilling to undertake some unpalatable tasks to pay off the financial obligations. For example, there might be sufficient equity in the debtor’s property to repay the debts when combined with the debtor’s income. This could result in selling the family home to release the value if the consumer cannot obtain a remortgage or if the conditions of a sub-prime remortgage are too high. A DMP could very well provide a means of putting off the selling of the family home or giving the borrower some respite until such time as a remortgage can be arranged on competitive conditions.
Will lenders approve the debtor’s proposal of monthly payment in a DMP? There are many DMP service providers with extensive expertise in negotiating with lenders and with a history of getting proposals accepted. Nevertheless, lenders aren’t required to approve reduced payments or freeze interest and charges and there is no guarantee that any ongoing or threatened legal action or case shall be terminated or withdrawn. Moreover, any debt collection cost suffered by a lender is frequently included in the debt. The DMP provider keeps the borrower informed regarding the position and movement 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 informed about their employee entering a DMP? Reputable DMP providers offer complete confidentiality and privacy in relation to the financial affairs of debtors. No information about the debtor is disclosed to any outside organizations including the debtor’s employer. Particular care is taken when making contact with the debtor to ensure that others will not learn of the debtor’s circumstances. Obviously the debtor needs to behave discreetly in communications with creditors and with any third party advisors to ensure that the DMP is not inadvertently 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 several different courses of action open to anyone in financial trouble who is trying to get relief. The borrower should become aware of all available choices prior to choosing which path to take. Some of the most prevalent solutions are Bankruptcy, Individual Voluntary Arrangement, Debt Relief Order, Debt Consolidation, Asset Sale & Debt Settlement and Property Remortgage & Debt Settlement. It could even be that financial aid can be obtained from a member of the debtor’s family or friends.
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