A debt management plan (DMP) is an informal arrangement where a debt management company (DMC) negotiates with your creditors on your behalf and manages reduced monthly payments to them. DMPs are one of several alternatives to bankruptcy available in England and Wales.

Informal Agreement: a DMP is not legally binding. Your creditors are not obliged to accept the terms, and you are not locked into a fixed contract.

How a Debt Management Plan Works

You provide the DMC with a full picture of your finances, including your household income, outgoings, other financial commitments, assets and debts. The DMC uses this to calculate your disposable income.

Disposable income is the amount left over each month after you have covered your essential living expenses and priority financial commitments such as rent, mortgage, council tax and utility bills.

The DMC then contacts your creditors, explains your situation, and asks them to freeze interest and charges while accepting reduced payments. Each creditor receives a share of your monthly payment on a pro-rata basis, proportional to the size of each debt.

Any creditor can refuse to accept the proposed terms. If a creditor declines, you can still make payments to them through the DMP, but they may continue to add interest and charges or take legal action to recover what you owe. Alternatively, you could arrange to pay that creditor in full outside the plan.

Most major creditors will agree to freeze interest and charges once they can see genuine financial hardship and a commitment to reasonable payments.

Who Should Consider a DMP?

DMPs only cover unsecured debts such as credit cards, personal loans, store cards and overdrafts. They cannot be used for secured debts like mortgages, or for priority debts such as council tax arrears, child maintenance or debts that would not be written off by bankruptcy.

DMP Fees and Costs

Some DMCs charge fees for setting up and managing your plan. These are typically deducted from your monthly payment before it is distributed to creditors, which means less goes towards paying off your debts.

Since 2014, all DMCs must be authorised by the Financial Conduct Authority (FCA). Before signing up, check the FCA Financial Services Register to confirm your chosen provider is regulated.

Free DMP services are available from debt charities including StepChange and PayPlan, as well as through the Money and Pensions Service (MaPS). Using a free provider means 100% of your payment goes to your creditors.

How Long Does a DMP Last?

The length of a DMP depends on the total amount you owe, the monthly amount you can afford to pay, any fees charged by the DMC, and whether your creditors agree to freeze interest. Some plans last a few years, others can run for much longer.

You can review and adjust your payments if your circumstances change. If your financial situation improves, you could increase payments to clear your debts sooner. If things get worse, your DMC can renegotiate with creditors on your behalf.

Breathing Space and DMPs

If you are getting professional debt advice, you may qualify for the Breathing Space scheme (also called the Debt Respite Scheme). This gives you legal protection from creditor action and freezes interest and charges for up to 60 days while you get advice and set up a debt solution. Your debt adviser can apply for Breathing Space on your behalf before or during the process of arranging a DMP.

Benefits of a Debt Management Plan

Things to Consider

DMPs Compared to Other Debt Solutions

A DMP is just one option. Depending on your circumstances, other solutions may be more appropriate:

• An Individual Voluntary Arrangement (IVA) is a legally binding agreement where you repay a portion of your debts over five or six years, with the remainder written off
• A Debt Relief Order (DRO) may be suitable if you owe less than £50,000, have minimal assets and little disposable income
• Bankruptcy may be the best route if you cannot see how you will ever repay what you owe. The application fee is £680

Each solution carries different implications for your assets, property and credit rating. Getting proper advice before choosing is essential.

We do not currently provide debt management plans, however we can assess your situation and advise on your suitability for other debt solutions including bankruptcy, IVAs and DROs. Use our free eligibility checker or request a call back for a no-obligation assessment.

This page provides general information only and does not constitute financial advice. If you are struggling with debt, seek advice from a qualified debt adviser or contact a free service such as StepChange, Citizens Advice or the National Debtline.