What is a Debt Management Plan in Scotland?
If you’ve got a serious debt problem and you feel like you’re struggling to keep your head above water, a Debt Management Plan (DMP) can help you get things back under control. It’s not the only option in Scotland however, and it may be worth considering a Debt Arrangement Scheme instead.
Both are suitable options if you usually have money left over at the end of each month (once you’ve paid your household costs, like food shopping, rent and utility bills) and you can repay your debts within a reasonable timeframe.
What is a Debt Management Plan?
A Debt Management Plan is an informal arrangement between a debtor and their creditors to pay a reduced, affordable amount each month towards their outstanding unsecured debt.
Unlike a Debt Arrangement Scheme (DAS), this option is completely flexible. Either side can change their mind at a later date, though this means that you have no legal protection from your creditors.
How does a Debt Management Plan work?
A debt management company will assess your incomings and outgoings using the Standard Financial Statement to decide what is an affordable amount for your monthly repayments. All debt management companies should have been authorised by the Financial Conduct Authority (FCA) to ensure they meet agreed standards.
The debt management company will then contact your creditors and negotiate with them on your behalf. They will ask for any interest and charges to be frozen.
With the help of a debt management company, your creditors are likely to agree to a fair repayment plan, which includes reducing or stopping any interest and charges.
However, neither of these benefits are guaranteed and you must rely on the goodwill of your creditors.
The debt management company should review your plan with you every year and give your creditors regular updates.
Which debts can I pay off with a debt management plan?
A Debt Management Plan can only be used to pay non-priority debts. These include:
- Personal loans
- Credit card, store card debts or payday loans
- Loans from a bank or building society
- Money borrowed from friends or family
- Catalogue debt
Which debts can’t I pay off with a Debt Management Plan?
You cannot use a Debt Management Plan to pay off priority debts, such as:
- Council Tax
- Income Tax, National Insurance and VAT
- Gas and electricity bills
- Child support and maintenance
- Mortgage, rent arrears and any loans secured against your home
- Hire Purchase (HP) agreements
- Court fines
What if my circumstances change?
If your circumstances improve, you will be free to increase your payments to pay the debt off quicker. Alternatively, if your financial situation worsens, you may be able to reduce your monthly repayments.
What are the disadvantages of a Debt Management Plan?
Unlike other debt solutions, you will still have to repay your debts in full. This could take several years.
A debt management company cannot force creditors to accept offers or freeze interest on your accounts. If you owe money to more than one creditor, a DMP does not guarantee that all creditors will agree to take part.
Even after a Debt Management Plan has been agreed, creditors may still change their mind and demand full payment. This could happen to anybody, regardless of how long they have been paying into a Debt Management Plan.
A debt management plan also offers no legal protection, and creditors may still decide to take court action against you.
Even though you will be repaying your debts, your debt management plan will still show on your credit file and your credit score will be affected.
What is the difference between a Debt Management Plan and a Debt Arrangement Scheme?
Unlike residents of England, Wales and Northern Ireland, Scottish residents also have access to the Debt Arrangement Scheme (DAS).
This is a similar scheme, but is backed by the Scottish government and offers a number of notable benefits over the Debt Management Plan.
Like the DMP, it lowers your monthly payments to an affordable level, but unlike the DMP it is legally-binding for both you and your creditors. This means that creditors can’t decide to terminate the agreement at a moment’s notice.
A licensed insolvency practitioner will work with you to develop a Debt Payment Programme (DPP), which is presented to your creditors for approval.
This will provide you with protection from any legal action whilst the arrangement is in place, as long as you comply with all the terms and conditions.
It also provides some flexibility in case you experience a loss or reduction of income, as your insolvency practitioner will renegotiate the terms of your agreement and you may even be able to take a break from payments for up to six months. Once in place, creditors are also prevented from applying interest or charges on their debt.
Valuable assets such as your home and car will be protected under this scheme. The same cannot be said of a DMP, which allows creditors to pursue various forms of diligence, such as an ‘inhibition order’. This would mean you would be unable to sell or remortgage your house without repaying the debt from the money you receive.
With a Debt Management Plan, you would still be open to constant harassment from creditors in the form of letters, emails and phone calls. This is taken care of for you in a Debt Arrangement Scheme.
The Debt Arrangement Scheme will also run for a fixed period of time, which can help you plan for the future and provide some motivation. Because you are not protected from interest and charges with a Debt Management Plan, it could continue for a much longer period with no fixed end point.
Only in exceptionally rare cases, where you require an agreement with your creditor which would last for a year or less, would a Debt Management Plan be more appropriate than the Debt Arrangement Scheme for Scottish residents. Unfortunately, many debt advisory firms still push those who would benefit most from a Debt Arrangement Scheme towards the more informal Debt Management Plan.
Is a Debt Management Plan Suitable for Me?
The Debt Management Plan can help you structure your debt repayments in a way that works for you. However, because the Debt Arrangement Scheme is government-backed and offers protection against legal action, this will provide a much greater level of security and could help you settle your debts sooner.
If you would still struggle to pay your debts in a reasonable amount of time, you may be more suited to a form of insolvency like sequestration. This has the most drastic impact on your credit rating and is usually only used as a last resort.
For more information about the Debt Management Plan and Debt Arrangement Scheme, or alternatives such as the Protected Trust Deed, and how each of these solutions could work for you, get in touch with Scottish Debt Expert for a free initial consultation.