DMP Disadvantages

Debt Management Plans (DMPs) can offer a number of advantages to those in financial difficulty over other options, such as bankruptcy. But as with all options, there are a number of considerations that should be taken into account when deciding which solution is best.

Obtaining future credit

While a DMP is not publicly listed on the Insolvency Register, nor is it publicised in any newspapers, by entering into a DMP, creditors are likely to issue a default notice as the debtor has, in effect, defaulted on the original credit agreement. This will be registered on the credit record, which will have implications for obtaining future credit.

Lack of contractual agreement

A DMP is a non binding agreement (i.e. there is no formal contract, but an informal agreement between debtor and creditor). While this can be a benefit in many ways, it does mean there is no protection should the creditors wish to take further action, such as petition for bankruptcy.

Debt may actually increase

As a DMP is not legally binding, creditors are under no obligation to freeze the interest. Therefore, should the monthly amount being repaid is not sufficient to cover the cost of the interest on some of the debt; it is possible for the debt to actually increase. However, if advice is obtained from a reputable Debt Management Provider, then this should be avoided.

Increase in duration of debt repayments

A DMP will not mean that the overall debt is reduced; it will still need to be repaid in full. Therefore, by reducing the monthly amount, it will take longer to clear the debt. Add to this the possibility that interest accrued may actually increase some of the debt; it may be better to consider an alternative option to a DMP.

As with any debt solution, it is important for the individual to seek advice from a professional advisor or Insolvency Practitioner (IP) to establish the best possible options available.

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