Debt Management
Debt Management Programme (DMP) FAQ'sA DMP should not be confused with an IVA which is a legal process administered by a licensed Insolvency Practitioner which, because of its formal approach is far more conclusive. Hopefully the following notes will explain the process...
A DMP is an informal agreement designed to allow a person who is struggling to meet their monthly debt repayments the opportunity to make a single more affordable but regular payment via a debt management company. In return for a management fee the company then pass these payments to the persons creditors until their debts are cleared. The most important part of the management companies duties should be to negotiate an interest and charges freeze on the debtors outstanding accounts and then regularly ensure that creditors continue this freeze during the term of the DMP. They should also ask creditors not to take any legal or recovery action providing the debtor keeps making their regular payments.
In theory a DMP should be a reasonable way in which a person can get out of debt. However, there can be problems. Over recent years debt management companies have sprung up all over the country offering vulnerable people a so called 'solution' to their debt problems. Whilst the majority of these companies provide a much needed service some of them have been criticised on TV., in daily newspaper columns or reported to the DTI....
......FOR NOT DOING WHAT THEY SAID THEY WOULD DO.
The main cause for complaint seems to be focused on whether interest and charges have been frozen on the debtors accounts in order to allow them a chance to repay their outstanding balances. Initially the management companies say they will try and get the interest and charges stopped but it is questionable as to how hard some of them really do try, if at all. When a debtor signs up to a DMP they could be forgiven for thinking that their debts will slowly reduce to nothing, due to the way that the DMP has been explained to them. However, it is not unusual for the debtor to actually end up owing more money to their creditors than when they first started their DMP, even after a relatively short period of time.
YOU SHOULD BE AWARE OF THE FOLLOWING.....
- If the debt management company does not manage to negotiate an interest freeze then it is highly likely that your debts could actually increase.
- You will almost certainly receive default notices from your creditors and letters and phone calls from collection agencies/solicitors who are chasing you for money.
The main attraction of a DMP seems to be their informal approach, but, in actual fact it is precisely this informality that can cause problems to arise. It often suits management companies to tell debtors what they want them to hear rather than what they need to know. Because of their desperation and the pressures they are experiencing, debtors are more likely to believe that this is the answer to their problem, putting their faith in advise that is sometimes 'questionable'.
In our opinion the problem with debt management is, there does not appear to be much, if any, negotiation with creditors. Due to this lack of creditor consultation, management companies often fail to gain the support of all the creditors and as such there seems to be a 'take it or leave it attitude' which can often antagonise creditors into taking legal action to recover their debt. When this happens most debt management companies don't even try or at best find it difficult to stop court action. Creditors are not obliged to accept a DMP and therefore, if just one creditor decides not to co-operate, preferring instead, to take their own action then it can leave the process unworkable. You should also bear in mind that debt management is not legally binding and that creditors are not obliged to freeze interest or reduce payments. Because debt management companies charge a fee for their service there is no real incentive for them to secure a freeze on interest or charges. The longer a DMP carries on then the more fees the management companies collect. Therefore, we find it difficult to recommend this type of action as a long term solution to debt problems.
If, after reading these notes you want to enter into a DMP, we would urge you to use the following criteria.....
Before using a debt management company you should be satisfied that the debts you have will be cleared in less than five years, otherwise, you may be better off using a different type of action such as an Individual Voluntary Arrangement (IVA). Multiply your debts by 17.5% and then divide the result by the monthly amount you can afford to pay. This will give you the approximate number of months it will take to clear your debt subject to your creditors agreeing to freeze interest and charges.
- Make sure that you use a fully licensed debt management company.
- Establish any charges that you will have to pay for their services.
- Ask to see evidence that they are trying to or have secured a freeze on all charges and interest and ensure that this continues during the DMP