Pexels liza summer 6347887
Debt Solutions Article

13th September 2024 · 5 minute read

Published by The Real Debt Guy

  • Debt management
  • Managing debt
  • Debt solutions
  • Debt management company

What does a debt management plan do? StepChange

Is a Debt Managment Plan (DMP) worth it?

If you don't know what a Debt Management Company is, don’t worry. You’re not alone. If you are experiencing financial difficulties and struggling to manage your debt, it’s good to know more about your options so you can be informed before taking steps that will impact your situation and your life overall.

Not in the mood to read? We got you covered. Listen to the rest with the YouTube link at the bottom of the page

What are Debt Management Companies (DMCs)?

Put simply, a debt management company manages and consolidates your debts into one single monthly payment.

It sounds simple, right? Well, in theory, debt management companies can be an attractive option if you’re struggling with debt because the process sounds simple, but there’s a little more to it than meets the eye.

Debt management companies aren’t free; their service comes at a price that may impact the amount paid to the creditor. This is a significant factor to consider, so we’ll return to it later.

For now, let’s explore how the debt management plan works.

How does a DMP work?

Meet Mark...

Mark is worried sick with debt. He’s built up over £30k of debt on credit cards and loans, and it’s becoming completely unmanageable. Every month, £1100 leaves his account on debt alone, and he’s sinking deep into the red. One day, Mark decided to contact a debt management company to see if they could help him regain some control. It took about 2 hours of being passed from person to person, but here’s what happened…


Step 1 – Information gathering

The DMC started by obtaining all the details of Mark's debts. This included things like who his debts were with, his account balances, and specific information such as reference numbers. Initially, It felt pretty daunting, as they wanted to gather as much information as possible from him. To make it easier, the Debt Management Company asked Mark for any letters or statements that held this information to create a complete picture. Before passing Mark on to the next person, they walked him through all the options to tackle his debt - an essential requirement of the FCA.

Step 2 – Your financial position

Next, Mark spoke to someone who took him through an income and expenditure form to better understand his financial position. They were looking for what funds he had left at the end of each month. As it turns out, Mark could only afford £700, whereas he had been paying a massive £1100 up until now.

Let’s pause here to cover an important point.

If you have very little or no funds left at the end of each month, debt management companies may refuse to manage your debt. This might make you believe you have no other options, but don’t worry, it’s not the case. All it means is this route is not right for you. If the debt management company agrees to manage your debt, don’t commit to anything without doing your research first.

Now, back to Mark…. Finally, the Debt Management Company went through the terms and conditions with Mark and a breakdown of fees he would be paying as part of the monthly payment. Mark agreed to go ahead. The paperwork was sent. Mark signed it, and so the process began.

Step 3 – Contacting the Creditors

The debt management company informed all the creditors that Mark was now in a debt management plan. From this point on, the debt management company handled all correspondence. If Mark received any letters, emails, or anything about his debt, he just sent the information to the debt management company. When the calls came through, he informed them that a debt management company was handling his debts.

He sighed a big sigh of relief because he finally felt in control. It’s important to remember that using a debt management company is just one of many options Mark had to take control of his debt. Before agreeing to an arrangement like this, it’s essential to understand what is in it for them.

How do debt management companies make money?

Like any other profit-making business, a DMC is in business to make money. So, how exactly do they make money from your debt? They will do one of two things when you pay them the agreed monthly payment.

Single monthly payment amount

Take a fee from the agreed single monthly payment you are paying them.
For example, if you’re paying £100 monthly, they may take £30. This means only £70 of your monthly payment will go to your debt and the creditors.

Creditor "donation"

Take a fee as a "donation" from the creditors.

For example, if you pay £100 per month and have five creditors, each creditor might receive £20 per month, of which a percentage will be paid back to the debt management company from the creditor.

The StepChange debt management plan is a prime example of this method. However, it’s crucial to understand that this approach could create a conflict of interest. To delve deeper into this, we recommend reading our article 'What you MUST know before using StepChange Voluntary Arrangements.'


Don't forget to read The Real Debt Guy's final thoughts below!

The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.

The Real Debt Guy's final thoughts.

At The Real Debt Guy, we believe it’s vital you have all the information and facts to make the right decision. If, after doing your research, you feel confident and emotionally in the right headspace, you could try to manage your debts yourself as a first port of call.

However, we understand that this is easier said than done. If you don’t feel emotionally okay, then, like Mark, debt management may be an option to consider. Be mindful of their fees, as this will reduce the amount paid to the creditor, or there may be a conflict of interest that could negatively impact you.

Remember, you’ve got this. You have options, and using a debt management company is just one. Before committing to a DMP, take a look at the Token Payment Method and explore what is involved. This method provides step-by-step directions and includes a template you can easily use to communicate with your creditors.

Simplifying complicated matters.

You might also like…

Speak to us

It's good to talk! Debt can seem like a lonely place, it doesn't have to be. Join our community to interact directly with The Real Debt Guy team and other members like you. Debt is not something that you have to suffer alone. We got you.

Speak to The Real Debt Guy