Debt Management Plans

If you are struggling to keep up with debt payments on things like credit cards, personal overdrafts and loans, Consumer Affairs advises that you reconsider what are your priority and non-priority debts and develop a debt management plan (“DMP”).

Priority and Non-Priority Debts

Priority debts are monthly expenses where you will likely face significant consequences if you fail to pay them on time. When developing your debt management plan Consumer Affairs advises that you keep priority expenses separate from your non-priority expenses and prioritize your priority expenses before entering a debt repayment plan for non-priority debts.

Examples of priority debts include, but are not limited to, the following:

Mortgage or rent arrears;
Gas and/or electricity arrears;
Land tax arrears;
Court fines; and
Arrears of maintenance payable to an ex-partner or children (i.e. child support).

Non-priority debts are less urgent expenses which if left unpaid will result in less immediate consequences when compared to the consequences associated with non-payment of priority debts. Non-priority debts include, but are not limited to, expenses such as:

Bank loans and personal loans
Credit cards
Student loans

It is at this stage that Consumer Affairs advises that non-payment of your bank loan, personal loans, credit cards and student loans held with financial service providers (i.e. banks) will likely negatively impact your personal credit history.

Agreeing to a Voluntary Debt Management Plan

A voluntary debt management plan is an informal agreement between you and your creditors, or between you and a debt collection agency (i.e. businesses that you owe money for consumer goods or services, landlord for rent arrears, etc.) specifically intended to schedule the repayment of your priority and non-priority debts.

A voluntary debt management plan is not legally binding. This means that you are not legally tied into the debt management plan for a minimum period and can cancel it at any time.

It is worth noting that failure to comply with a voluntary debt management plan may likely result in a creditor or debt collection agency pursuing legal proceedings in order to obtain a legally binding debt repayment plan (i.e. a court order).

A legally binding debt repayment plan will likely include a “default of payment” provision (i.e. imprisonment for a specified period of time if you fail to comply). Upon completing the mandatory imprisonment you will still remain liable for the debt outstanding.

If you have a debt in joint names with someone else, this can be included in your debt management plan. However, your creditors may still chase the other person for all of the debt. Whenever you take out a joint credit agreement (i.e. a loan or credit card), with another person, you are both liable for the full amount of the debt. This is known as joint and several liability.

If both you and your partner are struggling with debts, you might want to consider setting up a joint debt management plan where you would both be equally responsible for the repayment plan. It does not matter if you have different levels of income or debts. You can also include debts that are only under one name in a joint debt management plan.

Entering A Voluntary Debt Management Plan

A voluntary debt management plan with a creditor or debt collection agency may be a good option for you to consider if the following applies to you:

You can afford the monthly repayments on your priority debts (such as mortgage, rent and council tax) but are struggling to keep up with your credit cards and loans; or
You would like one set monthly payment which will help you to management your monthly financial budget.

However, Consumer Affairs advises that you fully understand the impact of entering into a voluntary debt management plan as it:

Will take longer to pay back your debt as opposed to one lump sum payment;
You will likely pay more over time as your creditor will like charge interest; and
Your creditors might refuse to co-operate and enter into a repayment plan or contact you in the event you default on repayment.

If you are unsure about whether entering into a debt management plan with your creditor or debt collection agency is right for you, you might want to think about other options for dealing with your debts.

Non-Compliance of a Voluntary Debt Management Plan

If a debtor fails to comply with a previously agreed voluntary debt management plan, and a creditor or debt collection agency decides to pursue legal proceedings in order to collect the monies owed from a debtor, the debtor will receive a letter from the creditor or appointed debt collection agency (i.e. a “letter before action”).

The letter before action will likely include a provision that will state that if the debtor in receipt of the letter before action fails to contact the creditor or debt collection agency within the prescribed period of time (e.g. 7 days) the creditor or debt collection agency will pursue legal proceedings against for the outstanding debt, interest and legal costs (if applicable).

Consumer Affairs advises that if you receive a letter before action from a creditor or debt collection agency that you contact them as soon as possible and enter into negotiations in order to potentially avoid incurring interest, additional fees and avoid the administrative burden of having to attend court.

In this instance, it is likely that the creditor or debt collection agency may not be willing to enter into another voluntary repayment plan and will likely require full payment of the debt outstanding in order to cancel the commencement of legal proceedings.

To avoid such a circumstance, Consumer Affairs advises that you comply with any voluntary debt management plan entered and communicate with your creditor or debt collection agency if your personal financial circumstances have changed (i.e. lost your job and unable to consistently pay the agreed amount).

Frequent and transparent communication may avoid your creditor or debt collection agency from pursuing legal proceedings as they may agree to temporarily amend the terms and conditions of your voluntary repayment plan.

Debt Management - General Guidance

Debt Management Plans