Glossary: Debt management plan
Not to be confused with a consolidation loan or bankruptcy, a DMP is a service offered by a specialist debt management company that will negotiate with your creditors to change the terms of how they get their money back. The debt company will renegotiate your debt repayment terms and then deal directly with your creditors on your behalf, and you then pay the debt management company, which passes the money to your creditors minus its initial and subsequent monthly fee. This can be as high as 20%, which means you’ll pay down your debts slower than you thought.
This entails taking out a loan to pay off others, often to secure a lower interest rate – a fixed interest rate or for the convenience of servicing only one loan. The problem is that many unsecured loans – personal loans, overdrafts, credit cards – are then made into one big secured loan and use any property you have as collateral. Fail to pay the loan and the lender can seize your home, so it’s not for those with unstable incomes. Also, don’t be fooled that your new monthly payment is a lot less than you were paying for all your old debts: you’ll be paying off your new loan over a much longer period which, in the long run, could cost you more. Consolidation also won’t address any underlying problems you have with your finances, so reducing or combining your debt repayments may only delay more serious problems, rather than solve them.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.