Do Debt Management Plans Ever Fail?

Can a debt management plan fail? This is the question that Cashfloat addresses in this article, so that readers beginning a DMP can set themselves up for success.

Cashfloat is a UK provider of short term and payday loans. As well as providing loans to our customers, we also try to help everyone by publishing useful articles on our blog. Our blog covers a range of financial topics, from advice on how to use a credit card safely to how to save money by doing your own DIY.

This article in our guide to debt management plans, discusses how often debt management plans fail and what people can do to avoid that happening to them.

Will I Finish My Debt Management Plan?

Some people who are considering beginning a debt management plan (DMP) may be wondering whether there is any likelihood that it could fail. With DMPs being an informal agreement with no legal protection, there is a certain amount of uncertainty that surrounds them. Sometimes, this leaves people wondering what the likelihood is that their DMP will succeed.

How Many Debt Management Plans Fail?

Unfortunately, it is not clear what percentage of DMPs are a success and what percentage aren’t. As an informal debt solution, there are no records made of the total number of people who enter into DMPs and how many are completed. Also, where information of this kind is released, it is also unclear if a DMP that hasn’t finished is considered failed or not. Some DMPs are only used temporarily or are finished early where someone is able to make a full and final settlement offer, for example. As a result, there is little statistical evidence to go on.

Because of this, it’s necessary to rely on anecdotal evidence and to look at the situation more pragmatically. The good news is that, by the vast majority of accounts, creditors normally stick to debt management plans. Where they are a viable solution to a debt problem, DMPs are likely to be a success. If you are able to agree to a debt management plan with your creditors, with payments that you can meet, there are few reasons why it should fail.

If you are sure that a debt management plan could resolve your debt problem and have discussed the situation with a professional and impartial debt advisor, then do not be discouraged by the prospect of failure. It may be helpful to know that hundreds of people in the UK do finish debt management plans every week.

Why Debt Management Plans Fail

It may be helpful to look at the most common reasons why debt management plans fail.

Poor Budgeting

Poor budgeting is often the cause of failure for debt management plans. There are a number of places where it can go wrong.

Possibly the most important thing when you start a DMP is to be absolutely sure that the budget is right. It is also important to review the budget and make sure that it is up to date and changed, if necessary. PayPlan has some useful information about budgeting for DMPs, which is available here.

Overambitious, Incorrect or Out of Date Budget

For your debt management plan to work, it is important that you are able to stick to the budget. Be careful not to be overambitious in the repayment targets that you set for yourself. If you leave yourself too little money to cover your living expenses and priority debts, you may become unable to actually make payments towards your DMP. It is also important to remember to leave money to cover occasional and emergency expenses, such as car repairs for yourself in your budget.

As well as setting a realistic budget to begin with, it is also important to make sure that it is kept up to date and corrected if need be. It may be that you have missed expenses out in your original budget, the amount you need has changed or the cost of your expenses has increased over time. You should review your budget at least annually with your DMP provider. However, if you need to make changes to it before an annual review, make sure that you contact them to do so.

Poor Communication

Poor communication between people who are on DMPs and their DMP provider can be the root cause of budgeting problems. If you are struggling to get by on your budget, do not be afraid to contact your DMP provider. It is usually possible to make the necessary adjustments to DMP payments in order to allow someone enough money to get by.

Debts Left Out

Sometimes people do not declare certain debts when they begin a debt management plan. After they have budgeted themselves to make priority debt, living expenses and DMP payments, there should be no spare money left to pay towards other debts. Where people do this, they usually find that they are unable to spread what money they have around successfully. This can lead to them failing to make payments towards their DMP.

More Debts Acquired

In some cases, people get further into debt while they are on a debt management plan. In many cases, doing so will be against the conditions of the DMP, which could cause problems in itself. On top of this, acquiring further debt can lead to DMP payments becoming impossible to meet. In some cases, this happens when someone needs extra funds to cover an emergency expense. If this happens to you, instead of taking on debt, you should speak to your DMP provider to see if they are able to negotiate a temporary change to your payments. In many cases they will be successful.

Poor Debt Advice

Where debt management plans do fail, it may be that the person who started it was given poor debt advice in the first place. They may have been advised to begin a debt management plan that was unrealistically long and, as such, was an inappropriate choice of debt solution. In these situations, it may have been better to find an alternative solution, such as an individual voluntary arrangement, a debt relief order or selling assets.

It is worth noting that there have previously been a number of reports of poor debt advice being given out by fee charging debt management companies. It is always better to go with a free debt charity, such as PayPlan, StepChange or Christians Against Poverty, rather than with a debt management company.

Long Debt Management Plans Can Be a Problem

Particularly long debt management plans can be more difficult to stick to and could be more likely to fail. It is worth carefully considering how long your DMP will last and, if it is considerably long, looking at possible alternatives. There have been reports of people being offered debt management plans which would have taken decades to complete. While, initially, they may bring control to someone’s life, entering into a debt management plan which is unrealistically long is more likely to end in failure.

It is worth noting that DMPs arranged by debt management companies may be considerably longer just because of the fees which these companies charge. These fees just add to the debt and make it take longer to repay. The same service (and a shorter debt management plan) can be obtained for free from a debt charity.

What You Can Do To Ensure Success

Here’s some quick advice about what you can do to give yourself the best chance of success:

• Set Up the Right Budget – As we said already, good budgeting is essential for a successful DMP. Make sure that your budget leaves you enough to cover your priority debts and to provide a reasonable quality of life for you and your family. Pushing yourself too hard could just mean that DMP payments become hard to meet.
• Stick to Your Budget – When your budget is in place, make sure that you stick to it. Plan carefully and make sure that you don’t overspend. You should be aware of how much money you are able to spend, just be careful not to overspend unnecessarily.
• Look for Ways to Save – If you can find ways to save money, then this will help you to spread it further. Things like bulk buying, price comparison and finding out what you don’t actually use can all help.
• Make Payments – It may seem obvious, but make sure that you stick to making the payments that you need to. If, you are struggling to make them or think that you might miss one, then speak to your DMP provider so that they can make changes if they are needed.
• Review Your Budget – Keep on top of your budget and make sure that any changes that are needed are made before a problem develops.
• Tell Your Debt Management Plan Provider About All of Your Debts – As we mentioned earlier, sometimes people fail to declare some debts when they begin a debt management plan. Make sure that you tell your DMP provider about all of your debts. It is better to be upfront and honest than to enter into a plan which might end in failure.

In Summary…

While it is possible that a debt management plan will fail, it is important not to be discouraged by the prospect. A huge number of people have been able to clear themselves of debt with debt management plans. If you are worried that your DMP could fail, it is important to make sure that you have approached the situation carefully. Hopefully, the advice we have given in this article will help you to do so.

Chapter 7:
Debt Management Plan Vs Debt Relief Order

Chapter 9:
Will a Debt Management Plan Affect My Partner?