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From Wikipedia,
the free encyclopedia A Debt
Management Plan (DMP) is a method used in various countries for paying
personal unsecured debts. Typically, such debts are out of control -- even
minimal payments are late and take too large a portion of income, or even
exceed it. A DMP usually involves a third party organization that aggregates
all or some of the debts, assessing income and budget, and re-negotiating
interest rates and payments with the lenders. The negotiated rates and
payment plan is based upon the probability of a higher likelihood of
collection by the lenders in light of the debtor's more realistic monthly
repayment.
How Does A DMP Work?
DMPs are typically a managed arrangement
with creditors through a third party. The debtor may use a free
creditor-sponsored DMP organisation or a fee-charging DMP company. Accepting
any terms of a DMP proposal put forward on behalf of the debtor is always at
the discretion of the creditors. A good debt advice service recognises this
and will only suggest a debtor pays what they can realistically afford after
their priority expenses are met. Priority expenses usually include mortgage
or rent, food and utilities. Creditors usually request a review of the
debtor's situation annually to ensure they are paying as much as they can
reasonably afford.
Fee-Chargers
Fee-charging DMP companies will often
charge up-front fees as an 'admin' charge, and then will charge a percentage
of the surplus that is paid to the creditor as a fee to the debtor. The
larger the payment the debtor is encouraged to make, the larger the fee the
fee-charging DMP company receives. Also, there is the possibility that a
fee-charging DMP company will enter a debtor into this kind of arrangement
when it is not in the debtors interest and bankruptcy might be a better
alternative, especially if the debtor has large debts and it would take them
many years to pay their debts back this way.
The fees charged by DMP companies are
usually a percentage of the monthly amount paid, money that could
theoretically be going to clear the debt itself if no fees were charged to
the debtor. However fee-charging companies usually offer enhanced support
and administration services to the debtor throughout the programme. It is
also common for fee-charging companies to employ dedicated "creditor
liaison" departments who can negotiate with creditors directly in terms of
stopping interest and other charges being added to the debts in question.
First Finance Servicesare an examaple of a
fee charging debt management company.
What Kind Of
Debts In A DMP?
People that use a DMP to eliminate their
debt will typically only have unsecured debts such as personal loans, credit
cards, bank overdrafts and store cards included in their plan. Secured debts
or priority costs, like mortgages, car HP repayments, rent and utilities,
are not subject to monthly payment reductions.
Credit Ratings
When someone participates in a DMP the
likelihood that their credit rating will be damaged already is very high. It
is not the DMP that affects the credit rating directly, but the inability of
the debtor to meet their contractual payments that will be recorded on their
credit file - usually in the form of a default notice. Any Court action
taken by the creditor is also recorded on credit files.
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