Before committing to a Debt Management Plan (DMP), it’s a good idea to consider all the benefits and drawbacks. Although DMPs can be a great option if you are struggling with debt, as they allow you to pay back on your timescale and budget, they are not always a magic fix. There are a range of advantages and some disadvantages which are worth thinking about before you agree to a DMP.

To help you make your decision, this guide provides a full list of DMP pros and cons so you can decide if it’s the right debt solution for you.

What are the advantages of a Debt Management Plan?

When faced with outstanding debt to a number of creditors, it can feel overwhelming. There are some definite benefits of a Debt Management Plan which will help you get on track to becoming debt-free. These include:

The debt is consolidated

By consolidating your debt into one single payment, a DMP makes it so much easier to manage your debt. It can be stressful to have multiple creditors all with different deadlines each month. Trying to track and organise these payments can mean you end up with late fees. A DMP makes the process of repaying debt much smoother and easier. 

The payments are more manageable

When you apply for a DMP, your monthly income and expenses are taken into account to calculate a monthly amount that you can afford with your disposable income. This means that your debt is broken down into smaller, more manageable chunks. You won’t need to worry about paying an amount you can’t afford as a DMP is designed to suit your budget.

Your creditors may freeze interest or additional charges

Usually interest rates for unsecured debt can be incredibly high, causing your debt to build up quickly. As part of the process of getting a DMP, your DMP provider will negotiate with your creditors to find an agreement that suits everyone. This may result in the freezing of interest and additional charges so you can pay your debt back sooner.

There is little to no contact with your creditors

One of the main benefits of a Debt Management Plan is the support you receive from your debt advisor throughout the process. They will deal with your creditors directly on your behalf and when all parties agree to the DMP, it should be easier for you to keep up with your payments so they won’t need to contact you. A DMP can provide relief from the constant chasing and letters.

You won’t be recorded on the insolvency register

Unlike formal debt solutions such as an Individual Voluntary Agreement (IVA) or Bankruptcy, a DMP is an informal agreement and as such, is not publicly recorded on the insolvency register. This is a public database which can be accessed by anyone, including future employers and creditors. A DMP therefore keeps your financial situation more discreet.

What are the disadvantages of a Debt Management Plan?

In addition to the benefits of a DMP, there are also some drawbacks which you will need to consider carefully before making your final decision.

The debt still needs to be repaid in full

Some debt solutions such as IVAs or Bankruptcy write off all or a percentage of your debt. However, when you agree to a DMP, you have to pay back all of the debt you owe as well as any additional charges, meaning it’s often a more expensive option.

It can take longer to complete than other debt solutions

As you need to repay all of your debt, your DMP will last as long as it takes for your monthly instalments to cover everything you owe. It could take years for you to repay everything, meaning that the path to becoming debt-free can be longer than other debt solutions.

Your creditors could still take legal action

A Debt Management Plan is not legally binding meaning you don’t have legal protection. While it’s likely that once you’ve agreed to a payment plan and keep to your payments, you won’t hear from them, your creditors are still allowed to contact you. They can also stop the DMP at any time or pursue your outstanding debt through the courts if they wish to do so.

A DMP can’t tackle all types of debt

There are two types of debt – priority and non-priority. A DMP only covers non-priority debt which includes debts such as credit cards, overdrafts, store cards and water bills when paid directly to the water company. Priority debts, on the other hand, have serious consequences if you don’t pay them off, and include things like rent, court fines and electricity bills. If your debt is mainly priority debt then a DMP is probably not the right option for you.

Any credit card accounts will need to be closed

If you have any credit cards included in your DMP then you will need to close those accounts as part of the agreement so you don’t accrue more debt. You will also be advised to close any other credit card accounts to reduce the risk of creating more debt elsewhere.