For those with unsecured debt who are struggling to make the monthly repayments, DMPs are a popular alternative to
Individual Voluntary Agreements (IVAs) and Bankruptcy. As an informal agreement, they are flexible and allow the debtor
to repay an affordable monthly amount to their creditors until they are debt free. As it is an informal (non-legally
binding) agreement, creditors will still expect 100% of the outstanding debt to be repaid, however this has the advantage
that they cannot demand that homeowners release equity or sell their home.
Extended repayment period
As a DMP is designed to reduce monthly repayments, and because the creditors will still require 100% of the debt to be
repaid, then the overall length of the DMP will logically be over a longer period. A simple way to establish how long
the DMP will last, is to calculate the total debt to be repaid and divide that by the monthly repayments to be made under
the DMP. If there are any Debt management fees within the monthly amount, these should be deducted prior to the calculation.
For example, a debtor owes £5000 to a number of creditors. It has been calculated that they can afford to repay £200 per
month. £25 of this will be the Debt Management Company's fee (this figure is for illustrative purposes only and the actual
figure will vary depending on the circumstances), leaving £175 to repay the creditors. This will mean that the total debt
will be repaid in 29 months (5000/175=28.57).
Finishing the DMP early
DMPs are often used when someone has had a change in circumstances, such as being made redundant, which could only be a
temporary setback. As DMPs are very flexible, should circumstances change again for the better, then the debtor will be
able to repay more to the creditors, thus clearing the debt much faster. Furthermore, should the debtor find themselves in
receipt of a windfall, such as an inheritance or lottery win, while there is no need to declare this in the case of a DMP,
it may be used to clear or pay a lump sum off the debt. Indeed, if the lump sum is adequate, then the creditors may be
prepared to accept a reduced lump sum repayment to clear the debt completely.
As with any debt solution, it is important to seek advice on the best possible course of action.