==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-charging DMP companies will often charge up-front fees as an 'admin' charge, and then will charge an on-going management fee. This fee may be proportional to the monthly contribution, or proportional to the number of debts they are managing. OFT guidelines in the UK state that the debtor shall be made aware of all possible solutions to their circumstances. These solutions could include Re-mortgage, additional loan, Debt Management Plan, IVA (Consumer proposal in Canada), Protected Trust Deed (In Scotland), Full and Final Settlement, Bankruptcy and Debt Relief Order (In the UK).

Each of these solutions has benefits and disadvantages. Some may incurr more costs to the debtor, some may cause more harm to the Debtors credit rating. While the stigma of Bankruptcy appears to be reduced these days, many Debtors still regard Bankruptcy as an unacceptable alternative. An Income Payment Order may also be imposed by the Trustee in Bankruptcy of up to 66% of the Debtor's monthly disposable income.

Fee Charging companies employ staff to "Advise" on the best possible solution for the client and their current circumstances. As Fee Charging Debt Management in the UK is largely unregulated, there is a wide variance in the quality of advice available. Some companies may give advice that is not in the client's best interests but is more profitable for the company.

The fees charged by DMP companies could theoretically be going to clear the debt itself if no fees were charged to the debtor, however fee-charging companies may offer enhanced support and administration services to the debtor throughout the program. 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 which may result in an overall saving for the Debtor.

Non-fee or low-fee DMP organisations are typically charities or government agencies that offer a consumer credit counselling service. Their function is typically the same as a fee-paying DMP but without a fee charged directly to the Debtor. The funding for these services varies in its source: The government funds some advice agencies who advise and prepare a debt plan but do not manage the payments and correspondence. Some organisations claim charitable status and accept donations from Creditors to administer debt plans on their behalf. In the USA and Canada, the majority of Debt management companies are allowed to keep a "fair share" of the distributions by the creditors if they can prove they are a "not-for-profit" organisation. In the UK, there are relatively few companies who operate in this way and most charge fees to the Debtor.

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.

When someone participates in a DMP, some creditors may choose to register a Default Notice with credit reference agencies. This would affect the Debtor's chance of being accepted for further credit. If defaults have already been registered against the debtor, entering into a DMP may not significantly affect their credit rating. The DMP itself is not recorded on the credit file, but the inability of the debtor to meet their contractual payments will be recorded. Some creditors may choose to enforce the payment of a minimum amount by seeking a County Court Judgement against the Debtor. Any such court action taken by the creditor is also recorded on credit files.