Debt management plans in the UK: pay less, and never pay for advice

A debt management plan (DMP) is an informal arrangement to clear your non-priority debts at a rate you can actually afford. Instead of juggling several payments, you make one monthly payment that a provider shares out among your creditors. The single most important thing to know: you never have to pay for this. Reputable, free providers will set up and run a DMP at no cost.

What is a debt management plan and how does it work?

It is a voluntary way to deal with non-priority debts. You make one affordable monthly payment to a provider, and they divide it between your creditors. As the free service National Debtline puts it, a DMP "involves you making one affordable monthly payment to a debt management company." You can run a plan yourself by negotiating directly with creditors, but most people use a provider to handle it.

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Do you have to pay for a debt management plan?

No. You should never pay for debt advice. The charity StepChange states plainly that "StepChange offer DMPs for free," while "most debt management companies charge for DMPs." The government lists free services on gov.uk, including National Debtline, Citizens Advice, PayPlan, Community Money Advice and StepChange. A fee-charging firm keeps part of your monthly payment, so less reaches your creditors; a free provider passes on the full amount.

How do priority and non-priority debts differ?

Only non-priority debts go into a DMP. National Debtline explains you "can include non-priority debts such as credit cards, loans and buy now pay later agreements in a DMP," whereas "priority debts such as mortgage, rent or energy arrears will need to be dealt with separately." Debts are "priority" not because of their size but because of what happens if you don't pay: you could lose your home, your energy supply or your liberty, so they come first.

Is a debt management plan legally binding?

No. A DMP is not legally binding. National Debtline confirms it is "not legally binding so you can leave the plan at any time." The flip side is that creditors do not have to accept your offer, and they do not have to stop interest: your provider will ask them to freeze it, but "creditors do not have to freeze interest under a DMP." If interest keeps being added, your balance falls more slowly, so check this before you start.

How does a DMP affect your credit rating?

It will usually show on your credit file and can make it harder to borrow. Reduced payments are recorded by your creditors, and some add a note to say you are on a plan. The marker can stay for several years, including after the plan ends, so weigh up whether you will need new credit soon.

What are the alternatives?

If a DMP isn't right, other routes exist, and the free government debt advice service can help you choose:

• Debt Relief Order (DRO). For smaller debts and few assets. Per National Debtline, your qualifying debts must not top £50,000, you must have £75 a month or less in spare income, assets worth no more than £2,000, and a vehicle worth under £4,000 is not counted. Most debts are written off after one year.
• Breathing Space. This government scheme gives you 60 days during which creditors must freeze interest and charges and stop collection and enforcement.
• Individual Voluntary Arrangement (IVA) — unlike a DMP, this is a legally binding agreement with your creditors.

ONLYWAY NEWS reminds readers: before signing anything, speak to a free service. Debt advice in the UK is free, and there is no reason to pay a middleman for it.