What is a Debt Management Plan?
What is a Debt Management Plan?
Simply put, a Debt Management Plan is an agreement that is made between you and anyone you owe money to; your creditors.
The main benefit is that the agreement will allow for a smaller amount to be paid each month, rather than the full amount as determined by the original terms and conditions of the credit when you first took it.
A Debt Management Plan doesn’t reduce the amount you have to pay back, although as part of the agreement, the creditors can agree to reduce or even waive further interest charges. Eventually you will repay everything that you owe, however it will take longer than you had originally intended.
Not all debts can be included in a Debt Management Plan. There are many significant exclusions such as:
Overdue payments to HRMC such as Income Tax or VAT
TV Licence costs
Overdue bills for gas, electricity, child support, council tax, or rent
Fines imposed by a Magistrates Court
Strangely, although utility bills are excluded, water bills can be included, as can:
Repayment of any benefit overpayments
How does a Debt Management Plan work?
Debt Management Plans are arranged and managed by a third party provider. Many of these are private companies who will charge a fee for their services. There are few rules about how much these companies can charge, however, they do have to follow the FCA rules about being absolutely transparent about how much they are going to charge.
Debt Management Plan providers must not charge more than 50% of the money you are paying them for administering your plan. This means that the most expensive providers can take £50 in fees for every £100 you pay into your account.
At the other end of the scale are debt charities, such as Step Change, who arrange Debt Management Plans without any fees at all.
Once the provider has agreed a budget with you that shows an amount that you can comfortably afford to pay toward your debts, they will approach your creditors to discuss what amount each of them would be willing to accept on a monthly basis. Once everybody has agreed, you will then start to pay a monthly amount to your Debt Management Provider who will then distribute it to your creditors.
Entering a Debt Management Plan is no guarantee that any creditor will no longer contact you or pass the debt on to a credit collection agency. They also still retain the right to commence court proceedings. In practice, the chances of any of these things happening are greatly reduced one the Debt Management Plan is up and running and you are making the regular payments as agreed.
Can a Debt Management Plan affect my mortgage application?
There is no specific place on your credit history file to show that you are on, or have had, a Debt Management Plan. However, every creditor you have will be shown on your file together with the amount you have borrowed, payment history, and any missed or reduced payments, including those made through a Debt Management Plan.
The purpose of a Debt Management Plan is to agree and make reduced payments on your debt. This will leave multiple negative footprints on your credit file as far as any mortgage application is concerned.
If you are a First Time Buyer, there would have to be exceptional circumstances for any mortgage provider to consider your application, though it would not be impossible. Logically, if you have sufficient money to put down as a deposit on a house then you would be asked by your creditors and your Debt Management Plan advisors why you are not using that money to clear or reduce your existing debts, as in most situations that would be the best thing to do.
If you already own a property with a mortgage, then your position might be slightly better. Especially if you have kept you existing mortgage up to date and have a good payment history with your current lender.
While it is very unlikely that your credit history will get you a mortgage with a mainstream lender, there are still many options from lenders who will look at individual circumstances. If, for instance, you are downsizing and reducing the size of your mortgage, you will have a better chance than if you were trying take on a much greater debt.
Equally, if you were looking to remortgage, and your income and circumstances allowed for it, in order to raise sufficient funds to clear all your outstanding debts then this would also stand a better chance of success.
How long will a Debt Management Plan stay on my credit record?
As previously stated, a Debt Management Plan does not appear on your credit file as a specific entity in its own right. However, each of the individual debts within the plan will appear.
As the Debt Management Plan is designed to reduce the amount of the monthly repayments then this reduced amount will appear on your file and will look like you are not paying the full amount each month.
This will be a red flag to any lender.
It is possible to ask the credit referencing agency to put an explanation on your file, but that is unlikely to make you appear as a better risk to any prospective lender.
Eventually, all your creditors will be paid off using the Debt Management Plan, however, it will take at least six years from the date that the final creditor is paid for all the bad credit history to be removed from your file.
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