Can I Do a Debt Management Plan If I Am on Benefits?
With the cost of living on the increase and family incomes under pressure, debt management is being increasingly used to resolve debt problems. We consider whether this solution is suitable if your income is made up primarily from benefits.
A debt management plan (DMP) is used where someone has personal debts that they cannot afford to pay.
It is an agreement with unsecured creditors to reduce the amount that is repaid each month so that payments are brought down to an affordable level.
The advantages of debt management plans are that they are extremely flexible. Payments can be increased or reduced and if you are a home owner, there is no obligation to release equity from your property.
Income from benefits is acceptable
The basis of a debt management plan is surplus (or disposable) income. This is the amount of money available to make payments to your creditors after your reasonable living expenses have been taken into account.
Monthly surplus income is calculated by deducting all reasonable living expenses from your total income after tax each month.
In a debt management plan, your monthly income can be made up from a range of different sources including benefits payments.
Even if your income is made up largely from benefit payments, you can still carry out a DMP.
Agree a reasonable expenditure budget
If you are considering managing your debts with a debt management plan, one of the most important things to get right is your monthly living expenditure budget.
Once you have started your plan, you should have enough money each month to pay for all your reasonable living expenditures without having to borrow more or dip into your overdraft.
You should not agree debt management payments which are too high and do not leave you enough to live on. If you do this, you will find that you are constantly missing payments and your DMP will fail.
For a guide to monthly living expenses while in debt management search online for Living Expenses Guide
Are there alternative solutions?
There are of course disadvantages to undertaking a debt management plan.
You will need to be aware that your credit rating will be adversely affected and of course the time it will take to repay your debt will be considerably extended because you are paying less each month.
An alternative way of managing debt is to use an individual voluntary arrangement (IVA). A key advantage of an IVA is that the payments you make will normally last for only five years. At the end of this period, any remaining debt is written off.
However, if the majority of your income is made up from benefits, it is likely that you will be prevented from doing an IVA. This is because creditors will generally take the view that an IVA is not suitable if you only have benefit income.
Government cuts to benefits payments
If your income is made up entirely or primarily from benefits payments, there is no reason why you should not carry out a debt management plan.
However, before starting such a plan, you need to fully understand the drawbacks and particularly the length of time it will take you to repay your debt if your income remains the same.
It is important to note that the Government has recently announced that many benefits payments will be reduce in April 2011.
As such, if you are currently funding a debt management plan from benefits payments, it is possible that these will reduce. In turn you will therefore have to reduce the amount you pay into your DMP meaning that it will take longer to pay off your debt.
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