Its funny how things come around and go around. 4-5 years ago, Debt Management Plans were a dirty word and it was difficult to get creditors to agree to them. Now, it seems that if you find yourself in financial difficulty, your creditors are positively falling over themselves to get you to enter into this type of plan. But what are the benefits to the individual debtor? 

Its true, compared to an IVA, a Debt Management Plan is relatively easy to put in place. Basically you work out what you can afford to pay each month to all of your creditors and then divide this equally between them on a pro rata basis. These reduced amounts are then offered to the creditors. Once accepted as reasonable, this situation gives immediate relief from your creditors as suddenly you are making regular monthly payments to them based on what you can afford – no more robbing Peter to pay Paul. 

If you are a home owner, a Debt Management Plan will normally not force you to consider releasing any equity from your house. In addition, the agreement is informal. As such, it is not a legal requirement to include all of your creditors. It is not recommended however quite feasible, that you can undertake a Debt Management Plan with most of your creditors but leave perhaps a credit card out and continue using that as normal.

This situation does sound good. But are there any downsides to the Debt Management Plan? There are clearly some things worth thinking about: Firstly, with a Debt Management Plan, you may be repaying what you owe at an easier and reduced rate. However, you still have to pay everything back. Normally this will take a considerable time – 8-10 years on average. It’s a long time to be living within a tight budget will little light at the end of the tunnel. Secondly, because the agreement is not legally binding, any party can change it at any time. If one of your creditors suddenly decides that £16.50 per month is no longer acceptable and they want you to pay more, they are at liberty to go back on their origional agreement. This means that Debt Management Plans are uncertain and you never know quite where you stand.  Thirdly, Creditors who agree to a Debt Management Plan are under no legal obligation to freeze their interest and charges. They may agree to do so for a certain time or may use the threat of continuing to add interest if you do not agree to paying them more each month than you can reasonable afford. 

In summary, a Debt Management Plan can be an excellent tool for resolving a debt problem. However, there are some significant pitfalls and disadvantages which you should also be fully aware of.

A Debt Management Plan (or DMP) is an informal agreement with creditors reducing the monthly repayments that they accept so that these fit within an affordable budget. With the significant increase in the number of IVA applications over the past 2-3 years, Creditors seem more and more keen for people to use a DMP to resolve their debt problems. I have seen a number of creditors hard sell the DMP solution suggesting that it is far better for the individual than an IVA. However, who’s best interests do the creditors have at heart?  

 When looking at a DMP it is essential to consider not just the short term gain but the long term result. If used properly, it is true that a Debt Management Plan will get immediate debt payment problems under control and bring an end to robbing Peter to pay Paul. However, the DMP will often not ultimately resolve the debt problem.  

The main issue lies in the fact that if you use a DMP, you are still obliged to pay back 100% of the debt that you owe. Clearly with reduced monthly payments, the time it will take to repay back what you have borrowed will be significantly extended. Simply dividing the total amount of debt you owe by the total monthly payment agreed in a debt management plan will give you the number of monthly payments you will have to make. In many cases this will be over 8-10 years.

Scrimping, saving and living within a tight budget to repay your debts is not easy. It is bad enough facing this for 5 years in an IVA, however, if your are looking down the 10 year path of a Debt Management Plan, many are just unable to comprehend it. This prospect just does not offer any light at the end of the tunnel. And with human nature being what it is, if we can not see progress, we are all too likely to give up. This is why that majority of Debt Management plans fail after their 1^st year. 

But if they have such a high rate of failure, why are the banks in favour of Debt Management Plans? One school of thought is that banks are allowed to treat Debt Management Plans more favourably when considering bad debt provisioning on their balance sheet where as debts within an IVA must be written off 100%. If this is the case, then there is a clear corporate benefit from pushing people down the DMP route and steering them clear of an IVA. But surely, what is needed here is a solution which is ultimately going to resolve an individual’s debt problem rather than one which seems to serve the creditors best interest of showing higher profits?

At the beginning of August, the official 2007 Q2 insolvency figures were released by the Government’s Insolvency Service. The headline figure was that overall the total number of people declaring insolvency (bankruptcy or IVA) had dropped on the previous quarter and only increased slightly on the previous year at 4%. Certainly not the double figure increases that we have seen in recent quarters and that some were predicting. 

But why is this? I do not believe that people have suddenly learned how to better manage their money and that personal debt problems have magically started to disappear overnight. Rather, the figures only record official insolvency – those who have formally been declared bankrupt or entered into an IVA. The figures do not include people how are struggling with debt but are trying to resolve this through an informal Debt Management Plan. 

A Debt Management Plan (or DMP) allows the person in debt to reduce the payments they make to each creditor to fit within a budget they can afford. However, the massive downside is that all the debt still has to be prepaid which will take many years without any legal protection from additional interest or charges. These plans are currently in favour with creditors. But why? Clearly a creditor will have the chance to get all their money back. However, the real reason is that the debt is officially still a debt and therefore an asset on the balance sheet. It does not have to be written off as it would with a bankruptcy of IVA. 

Banks are putting huge pressure on people in debt to choose the DMP route rather than a formal IVA. This means that individuals with crippling debt problems are having their pain prolonged with no light at the end of the tunnel. The end result – government figures for debt look better and banks get their own way again. However, it’s the people in need of help who are being overlooked and pushed deeper into the underworld of unrecorded debt.