Debt Management Plans [pros and cons] (2024)

FAQs

What are the advantages and disadvantages of a debt management plan? ›

If you're struggling to meet regular repayments, a debt management plan (DMP) can take some of the pressure off. But it can also make it hard to borrow money from lenders – this can affect your lifestyle and limit your options.

Some debt management companies are legitimate nonprofit credit counseling agencies, but many aren't. Common debt management scams and abuses by scammer credit counseling agencies include: failing to pay creditors on time under the terms of the plan. not paying creditors at all and keeping the deposits you make.

And remember, if you do opt for a debt management plan, it can impact your credit, so you may have to put getting new loans on hold while you get started with the plan. But over time, a DMP should help you improve your credit and start qualifying for better loans.

While debt management plans can be effective tools for repaying your debt, they're not always the best strategy. For example, secured debts and student loans aren't eligible for debt management plans, and credit counseling agencies may cap how much debt you can have to participate.

It's up to each creditor to decide whether to accept the offered monthly payment. They normally do! But 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.

A DMP may be a good option if the following apply to you: you can afford your living costs and have a way to deal with any priority debts, but you're 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.

Your credit history starts to look better after your DMP. Information like missed payments or court action is removed after six years. If an account has defaulted, the debt is removed six years after the default.

The main risks are financing risk (long-term refinancing and short-term liquidity risk), market risk (interest rate risk and exchange rate risk), credit risk, operational risk and legal risk.

Every participating creditor offers their own rates, but in aggregate, the average interest rate for accounts included on a debt management plan with MMI is below 8%.

The main debts left out of DMPs tend to be secured and priority debts, like mortgages or car finance agreements, which will need to be paid as usual. If you're struggling to pay any of your priority debts, you'll need to speak to your suppliers.

How long does a DMP stay on a file? ›

The accounts you are repaying your DMP through will already be listed on your credit report, and once the DMP is complete the marker will be removed and the accounts themselves will be marked as closed – they will then remain listed for six years from the settled date.

Debt management plans (DMP) are flexible. This means you may be able to pay off a DMP early. You can do this by increasing monthly payments or paying a lump sum.

Most credit card issuers will require that an account entering a debt management plan be closed. It may be in your best interest to reach out to creditors first and request that your accounts be closed. You may be allowed to keep a card for emergencies or business, though; ask before you sign up.

Pros of debt settlement programs include speeding up the repayment process, reducing the total amount owed, and avoiding lawsuits. Cons involve a negative impact on credit score, accumulation of late fees and interest charges, and results that can't be guaranteed.

Most mainstream lenders are reluctant to accept mortgage applications from borrowers on debt management plans. They are equally unlikely to offer mortgages to anyone with a completed debt management plan on their financial records. This does not mean that qualifying for a mortgage during or after a DMP is impossible.