Debt management plans are one of the most popular solutions for managing personal debts. We investigate how much you will need to pay each month if you want to start a DMP.
A debt management plan (DMP) allows to you reduce the payments you make to your unsecured debts so that they fit within an amount that you can afford.
This frees up cash so that you always have enough to pay your essential living expenses and do not have to continually borrow more to make ends meet.
One of the key advantages of the DMP is that it is a flexible solution. This means that there is no minimum or maximum payment required to start the plan. The amount you pay is based on what you can afford.
One of the main things you need to bear in mind when starting a debt management plan is that you still have to pay all of your debt.
Your creditors are agreeing to reduce the payments they receive from you each month. They are not agreeing to write any of your debt off.
As such, using a DMP will mean that it takes you much longer to pay your debt off and become debt free than if you were able to maintain your normal payments.
The total time it takes to pay off your debt will depend on the amount that you pay back each month. For this reason, the key to making the plan work is to ensure that you are paying as much as you can afford based on your income and reasonable living expenses.
The amount that you pay into your debt management plan each month is called disposable income.
Disposable income is the amount you have left each month from your total monthly income after deducting all of your reasonable living expenses.
Remember, your monthly income is the total of all of your sources of monthly income such as your wages after tax, any benefits you receive and any other money you have coming in.
Your living expenses are all the expenses you have to pay each month to live but not including payments to your unsecured debts.
See the Debt My Debt DMP living expenses guide for more information about living expenses.
When you are calculating your living expenses, try to make sure that the expenditure figures you use are kept to the minimum you can afford.
You need to include enough to cover all of your household debts and bills as indicated in the living expenses guide.
Always bear in mind that the higher your expenses are, the less disposable income you will have left at the end of the month to pay into your debt management plan and the longer it will take to repay the debts that you owe.
Having said this, it is very important that you try to include a budget in your living expenses under sundries and emergencies to cover unexpected expenditures such as the washing machine breaking down.
Make sure that you open a savings account so that this money can be saved each month to ensure it is available if and when the unexpected happens.
Once you have calculated your disposable income, it will be divided between each of your creditors as per your debt management plan.
Each creditor will be paid proportionally from your disposable income based on what they are owed.
Some of your creditors will accept the payments they are offered. However, it is possible that some will not and will reject the offer you make.
If your creditors have not agreed to your payments, they cannot stop you from paying them. However in these circumstances they may not agree to freeze the interest charged to your accounts meaning that your balances may continue to increase.
This is not an ideal situation. However, you should not allow yourself to be pushed into increasing your payment offer.
If you have correctly calculated your disposable income the fact is you simply cannot afford to pay more. If you try to do so, you will struggle to make your DMP payments and your agreement will start to fall apart.
Whether your creditors agree to your payment proposals or not, the golden rule with a debt management plan is to pay them as per your DMP proposals anyway.
Ultimately a debt management plan enables you to reduce the payments you make to your creditors to an amount that you decide you can afford.
The amount you pay should be based on your disposable income which in turn is based on a reasonable living expenditure budget. You are ultimately in control of this budget and therefore the level of DMP payments you make.
Having said that you must remember that if you believe you need to spend more each month than your creditors think is reasonable, they may reject your DMP proposal.
Nevertheless as long as your offer is based on the maximum you can afford, you should pay your creditors as per your proposal until such time as you feel you can comfortably increase the payments you make to them.
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