Debt Management Plans
What are debt management plans
Debt Management Plans are informal agreement between you and your creditors for paying back your non-priority debts. Non-priority debts are things like credit cards, loans and store cards.
You pay back the debt by one set monthly payment, which is divided between your creditors.
Most Debt Management Plans are managed by a Debt Management Plan provider who deals with your creditors for you. This means you don’t need to deal with your creditors yourself.
Debt Management Plans are not legally binding, meaning you’re not tied in for a minimum period and can cancel it at any time.
Debt Management Plans may be a good option if the following applies to you:
- You can afford the monthly repayments on your priority debts (such as mortgage, rent and council tax) and your living costs, but are struggling to keep up with your credit cards and loans
- You would like someone to deal with your creditors for you
- Having one set monthly payment will help you to budget.
Commercial debt management plans companies (DMCs) have a bad reputation and rightly so in many cases. Please note, although the points below relate in terms of the OFT, responsibility for the protection of consumers has since passed to the Financial Conduct Authority (FCA). There are 10 good reasons why you should avoid paying for debt advice from one of these companies:-
- Poor advice: Of the Office for Fair Trading’s (OFT) 148 visits to debt management firms, just 12 complied with OFT guidance and the Consumer Credit Act, with frontline advisers ‘providing consumers with poor advice based on inadequate information’. The OFT concluded that DMCs ‘are not offering the solution that is in the best interests of the consumer, but instead that which is most profitable to them’.
- High fees and charges: Consumers’ fees for commercial debt management services exceed £250m a year. Monthly debt management plan (DMP) fees are typically about 17% of the repayment, though many DMCs impose a minimum monthly fee of about £30, so the percentage paid by those making minimum contributions e.g. £80pm, is even higher.
- Front-loading: About three quarters of DMCs front load their fees. This means the company recoups most or all of its fees in the first months of the plan, with some imposing a minimum upfront fee of several hundred pounds. In most cases, creditors receive nothing for at least the first two months, pushing the debtor further into arrears.
- Flipping: About eight out of ten people entering an Individual Voluntary Arrangement (IVA) have already been through at least one other debt solution. Having already received front-loaded fees for a debt management plan, flipping a customer into an IVA could help a debt company maximise its profits.
- Poor advice from banks: The Financial Ombudsman Service (FOS) has received complaints from consumers struggling with debt whose bank has suggested they call a commercial DMC. This practice is unethical as it racks up even more debt due to fees, companies that refuse to continue freezing interest rates, etc.
- Unregulated service: Debt management firms must hold a consumer credit license, issued by the Office of Fair Trading (OFT). However, the debt management market is current unregulated. The OFT believes that the capacity of fee-charging debt management companies to profit from people in already desperate circumstances makes this an area of business where assured ethical standards are essential. Unfortunately, the recent findings show beyond doubt that statutory regulation is needed.
- Price comparison sites: Some price comparison websites, including Moneysupermarket.com highlight commercial ‘partner’ DMCs rather than free alternatives. Many observers believe that debt solutions are an inappropriate product to feature on a price comparison site.
- Commission-led sales: Many DMCs pay financial advisers hundreds of pounds for leads, which sales staff are under pressure to convert into business. Many observers believe that if sales staff are rewarded for the number of consumers they sign up to a particular debt solution, the risk of mis-selling is significant.
- Cross-selling: Some DMCs are part of a group that offers other services, such as loans, PPI and bank charge mis-selling claims and utility cost reduction. Details of unsuccessful applicants for a loan, for example, may be passed to the debt management arm, while DMP customers are cross-sold other services, such as a current account with a monthly fee. There is no need to take out these accounts, as most major banks offer a free basic bank account with no credit facility.
- Risk to your repayments: Many DMCs have gone bust in recent years. In its review, the OFT found evidence that some DMCs were either failing to pass on payments to creditors within five working days or not keeping customers’ money in a separate client account. The collapse of the DMC could lead to the consumer’s money being lost.
If you’re not sure about whether a Debt Management Plan is right for you, you might want to think about other options for dealing with your debts.