What does a debt management plan do? StepChange
Is a Debt Management Plan (DMP) Worth It? Understanding Your Options in the UK
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If you're unsure what a Debt Management Company is, don't worry. You're not alone. If you're facing financial difficulties and find it hard to manage your debt, it's useful to learn about your options so you can make informed decisions before taking steps that might impact your situation and your life overall.
With over 9 million UK adults struggling to pay their debts each month, and around 400,000 people turning to FCA-regulated debt management companies, DMPs have become an increasingly popular choice. But is it the right option for you? Let's take a closer look.
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What Are Debt Management Companies (DMCs)?
Put simply, a debt management company manages and consolidates your debts into one single monthly payment.
It sounds simple, right? Well, in theory, debt management companies can be an attractive option if you’re struggling with debt because the process sounds simple, but there’s a little more to it than meets the eye.
Debt management companies aren’t free; their services come at a price that may affect the amount paid to the creditor. This is a significant factor to consider, so we’ll return to it later.
For now, let’s explore how the debt management plan works.
How Does a DMP Work? A Real-Life Example
Meet Mark...
Mark is feeling really anxious about his debt. He has more than £30,000 in credit card and loan debt, and it’s getting harder to handle. Each month, about £1,100 is taken out of his account just to keep up with payments, and he feels like he's sinking further into trouble. One day, Mark decided to reach out to a debt management company to see if they could help him take back control. It took around 2 hours of speaking with different people, but here's what happened…
Step 1 – Information Gathering
The DMC started by gathering all relevant details of Mark's debts, including creditor names, account balances, and reference numbers. Initially, the process was overwhelming as they aimed to collect comprehensive information from him. To make it easier, the Debt Management Company asked Mark to provide any letters or statements with this information for a complete overview. Before introducing him to the next advisor, they explained all available debt management options, fulfilling FCA requirements.
Step 2 – Your Financial Position
Next, Mark spoke to someone who guided him through an income and expenditure form to better understand his financial situation. They were checking for what funds he had remaining at the end of each month. As it turns out, Mark could only afford £700, whereas he had been paying a substantial £1,100 until now.
Let's pause here to cover an important point.
If you have little or no money left at the end of each month, debt management companies might refuse to take on your debt. This could lead you to think you have no alternatives, but that's not true (see our Token Payment Method). It simply means this option isn't right for you. If a debt management company agrees to help manage your debt, make sure to do your research before committing to anything.
Now, back to Mark….
Finally, the Debt Management Company went over the terms and conditions with Mark, including a detailed breakdown of the fees involved in the monthly payment. Mark agreed to proceed, and the documents were sent to him. Once he signed the paperwork, the process began.
Step 3 – Contacting the Creditors
The debt management company informed all creditors that Mark was now enrolled in a debt management plan. From that point, they handled all correspondence. If Mark received any letters, emails, or messages related to his debt, he would forward them to the company. When calls came through, he would tell the callers that his debts were being managed by the company.
He let out a deep sigh of relief, finally feeling in control. It's important to remember that working with a debt management company is just one of many options Mark had to manage his debt. Before settling on such an arrangement, it's essential to understand what is in it for them.
How Do Debt Management Companies Make Money?
Like any profit-driven business, a DMC aims to generate income. You might ask, how do they benefit from your debt? When you make your monthly payment, they usually follow one of two payment methods.
Single Monthly Payment Amount
Deduct a fee from your agreed monthly payment to them.
For example, if you pay £100 monthly, they might deduct £30, leaving only £70 to go toward your debt and creditors.
Let’s look at a real example: MoneyPlus Advice charges new customers a £399 arrangement fee, plus an ongoing monthly management fee of £46 or 49% of your monthly payment, whichever is lowest.
If you pay £275 per month over 46 months to clear £10,000 of debt, you will pay £2,515 in fees alone. That’s more than 25% of your original debt going to the company instead of your creditors.
Creditor "Donation"
Accept a fee labelled as a "donation" from the creditors.
For example, if you pay £100 per month and have five creditors, each creditor might receive £20 per month, with a percentage of the payment paid to the debt management company as commission or "donation".
The StepChange debt management plan is a prime example of this method. However, it's crucial to understand that this approach could create a conflict of interest. To delve deeper, we recommend reading our article 'What you MUST know before using StepChange Voluntary Arrangements.'
When Is a DMP Not Right for You?
Knowing when a DMP won't work is just as important as knowing when it will.
You Have Little or No Disposable Income
If your income and expenditure assessment shows you have less than £50–£75 per month after essential expenses, most DMP providers will tell you this isn't a viable solution. Don’t worry, this isn't the end of the road. It simply means you can explore other options like our Token Payment Method, which puts you in the driver’s seat and lets you pay as little as £1 per month. Why not book a free Discovery Call to see how we can help you with this?
Don't forget to read The Real Debt Guy's final thoughts below!
The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.
