A debt management plan (DMP) is a way to repay your debts by making a payment each month to a debt management company (DMC) which then distributes the payment among your creditors on your behalf. The primary objective of a DMP is to reduce your monthly repayments to a more affordable level.

A DMP does not, necessarily, reduce the total debt because you are, still, legally obliged to repay your creditors in full. If interest and other charges are not frozen, you may have to settle a much larger debt and repaying less each month will, logically, increase the time you need to pay off your debts. The financial value of a DMP is whether the interest and other charges on your debts can be frozen or reduced.

Debt management companies (DMC) – also known as debt management plan providers – must be licensed by the Office of Fair Trading (OFT).

Some creditors may not want to deal with your DMC but when payments are made by someone acting on your behalf, the practice of creditors returning payments or not crediting the payments to the consumers' accounts is not acceptable to the OFT.

Your DMC will try to negotiate with your creditors to freeze your interest charges and if this is not possible to, at least, reduce the interest charges. Your creditors are not legally bound by the DMP and they don't have to agree to any proposals that may be presented to them.

In addition to trying to negotiate down your interest charges your DMC can, if required, talk to your creditors to try and stop legal proceedings against you.

Unsecured non-priority debts which can be covered in a DMP include debts from credit cards, store cards, catalogues, overdrafts and unsecured loans from banks. Debts such as your mortgage payments, secured loans, rent, utility bills, council tax, student loans, maintenance and child support arrears cannot be included.

Initially the DMC's services may include reviewing your financial circumstances to determine an affordable monthly payment amount, negotiating with your creditors and setting up the DMP. After setup the DMC's work includes collecting the monthly payment from you and distributing this among your creditors, providing payment statements to you and reviewing your circumstances periodically.

DMCs usually charge fees for their services. For the initial fee the DMC may take the first one or two months' payments which you pay into the plan. For the ongoing administrative fee the DMC may take 15% or thereabouts of the monthly payments. Initial and monthly fees may be subject to minimum and maximum amounts.

With a DMP you will be making monthly payments that may be below the minimum contractually agreed amounts and this will put you into or further into arrears. Additionally, if the first one or two months' payments go to the DMC as fees then you may be defaulting on one or two months' payments to your creditors. Arrears and defaults are usually recorded on your credit reference file and can affect your credit rating making it more difficult for you to get credit for some time. The records are held by the credit reference agencies for six years.

Possible advantages of a Debt Management Plan

1. Making a smaller monthly payment can help you handle your finances better.
2. Most of your unsecured debt can be included.
3. If your creditors agree to freeze or reduce interest and other charges then the total debt may not increase greatly.
4. If you can increase your monthly payments you can settle the debts sooner.
5. Having an intermediary between you and your creditors where your creditors stop contacting you and communicate with you through your DMC can be stress relieving for you.
6. DMPs may be more acceptable to creditors than IVAs because debts in a DMP are usually not written off, so creditors are likely to get more money back.
7. The DMP can be kept private and confidential between you and your DMC.
8. At the end of a successful DMP the debts included in the plan are settled.

Possible disadvantages of a Debt Management Plan

1. In a DMP you are expected to repay the total debt. Creditors are not legally bound to freeze interest and other charges and your debts can increase significantly if they are not frozen or reduced - unlike an IVA where charges are frozen and some debts are written off.
2. Making smaller payments each month means taking a longer time to repay your debts. There is no time limit to a DMP which lasts until you have repaid all of your debts and if interest and other charges have not been frozen, it can take a very long time - unlike an IVA which has time limits.
3. A DMP can damage or further damage your credit rating making it more difficult to get credit in the future because of defaults and arrears - unlike a debt consolidation loan which can prevent further damage to your credit rating.
4. A DMP is not a formal debt solution and creditors can take legal action to recover the unsecured debts - unlike an IVA which is legally binding.
5. Despite having a DMC as an intermediary between your creditors and yourself, there is no legal obligation for creditors to stop chasing you direct for payment - unlike an IVA which is legally binding or a debt consolidation loan where some or all of your existing debts are paid off.

To help protect the interests of consumers the OFT has updated their debt management guidance and has also revoked or not renewed the consumer credit licences of a number of debt management companies which they have assessed as not complying with correct practice.

There are hundreds of debt management companies in the UK and if you feel that a DMP could be right for you, your local branch of the Citizens Advice Bureau which you can find at www.citizensadvice.org.uk should be able to help you with more information.