Warning over debt management plans

A quarter of people on debt management plans will take at least a decade to clear their borrowings, research showed today.

Insolvency trade body R3 said many people are becoming "slaves to their debts", as in 26% of cases it will take 10 or more years to repay what they owe.

Under debt management plans (DMPs), people struggling with debts agree with their creditors to repay a set amount each month.

But unlike formal insolvency agreements, none of the debt is written off and interest is typically still charged on it.

R3 said it is concerned that the plans are being offered to people for whom they are not appropriate, as they are intended to be short-term repayment plans.

Peter Sargent, president of R3, said: "DMPs can play an important role in offering a manageable solution to individuals who are able to pay back their debts.

"However, the sheer length of some plans indicates that the amount of debt these individuals have is too large for a DMP. By entering into these inappropriately lengthy plans people become slaves to their debts."

The group said its research also showed that 30% of people who are currently bankrupt or in an individual voluntary arrangement (IVA), under which interest on debt is frozen in exchange for a set amount being repaid each month for five years, had previously been on a DMP.

Mr Sargent said: "The volume of those who go from DMPs into a formal insolvency procedure suggests that, in some cases, DMPs prolong distress when another procedure would have been more appropriate to start with."

A third of people on one of the plans said other options for dealing with their debt were not discussed, while 22% said they were not asked for proof of their income or expenditure before the plan started.

R3 said it is "incredible" that organisations setting up the plans had not verified these details, as it risks repayments being set too high.

It added that 46% of insolvency practitioners had seen the plans fail because the monthly repayments are too high.

ComRes questioned 1,961 people who said they were struggling with debt between December 17 and January 7.