Stay in Debt or Use a DMP, whats right for me?

Hil_Hil

Hi,

I am looking for some advice really. I have around 22,000 pounds of debt mostly credit cards with a small personal loan I have almost finished paying off. I have 3 credits cards. 2 are maxed out and one is empty. I basically wait for an interest-free balance transfer option and transfer to the empty card which I have been doing for around 6 years now.

The credit cards aren't really going down I end up using them again if I have an unexpected expense. 

I am married and our joint income is probably around 3200 a month. We have about 900 pounds left a month after all bills. This covers food and anything we might do with our two children. I don't feel like we are in massive debt but do feel like our lives are affected and we can't live as we should be living. 

Sorry if my explanation isn't brilliant but just wondering if something like a DMP is a better option for me so I actually clear the debt rather than juggle it around to different cards. My personal loan ends in November and that's 240 extra a month which will be helpful.

We rent our home at the moment but in 8 years have the option to buy and I also worry a DMP could cause issues with me trying to get a mortgage in the future even though that's 8 years away. 

Any advice would be appreciated and thanks for taking the time to read my post.

Rob5342

It sounds like a DMP is something you should seriously consider. If you have been living this way for 6 years how likely is it really that you'll be able to pay it off? If you got that £22,000 interest free and paid your £240 towards it that will still take you nearly 8 years to pay off. With a DMP you would probably get it interest free and could potentially pay a little bit more so clearing it in 5 or 6 years may be a possibility. Without one you'd likely be paying some interest, and interest free transfer options could stop coming, so it could easily end up being 12+ years before you pay it off.

I'd suggest looking at Stepchange - you can put all your details in anonymously on their website and they will recommend a soultion. You don't have to use them for the final thing but it might help you quantify how long things might take.

I was a in a similar soultion to you, I kept telling myself it wasn't a massive debt and that I could manage it by using 0% options etc. The result was that my debt level just kept increasing for 10 years and I got into more and more debt. I started a DMP a year ago and that's made a massive difference and I've nearly paid a quarter of it off already.

Defaults will drop off your credit record after 6 years, so if your debts default within the next two years they won't be on your credit record when your option to buy comes around. Arrangements to pay are different and drop off 6 years after you finish them. The advice here seems to be to stop paying completely so you get defaults to ensure they will drop off quicker. 

sourcrates

Without seeing a fully costed SOA, its difficult to advise, but as a general rule of thumb, there should not be any "unexpected expense", ideally you would budget for such things, stop spending on the credit cards, and try and reduce your outgoings if possible, save an emergency fund to help with unexpected bills, this will stop your reliance on the credit card, help you reduce your debt, and allow you to live within your means.

Blodyn82

I would create an SOA as sourcrates suggested. Work out exactly what you have to pay your debts every month and start from there. It is important that you factor everything in and something for an emergency fund so that you're not tempted to use your credit cards. What I did after doing this was create a spreadsheet, used the snowball method, and worked out how long it would take me to re-pay the debts. You can then see if a DMP would be suitable, or if you can tackle your debts without one. 

I started at £43k and have been slowly paying it back since July 2020 without a DMP. I'm around half way through now and should have paid my debts back by Jan 2024 if all goes well. I was like you before, trying to pay things back but I didn't really have a clear plan and kept using my credit cards for things that I saw as extras like holidays. Now that I have a clear idea of the debt I'm in, where my money goes and have a clear plan I am on track to pay it back. It is a hard slog, but I know it will be worth it in then end. 

Good luck whichever route you decide to go.

kimwp

I think the key question you need the answer to is: can you live on your income without incurring more and more debt? Because if you can't, it doesn't really make a difference what you do, you'll continue to be in debt or go into a DMP, affect your credit rating for a bit, then go back into debt.

With the income you have, it's likely that you can live without getting into debt - putting your SOA on here will enable us to give you advice to achieve it. The lemonfool website has an SOA template and you'll need to put in what you actually spend (go through your bank statements) rather than what you think you spend. Divide annual spends by 12.

EssexHebridean

As Kim says above - you need to actually tackle the root cause before trying to find and use the solution - otherwise essentially you're using a sticking plaster over a gaping wound - you might patch things up temporarily but in the longer term not only will you still carry on "bleeding", things will actually get even nastier. 

You say you have £900 left after the things you *have* to pay. That's a great starting point - assuming a sensible budget, so maximum of £300 for food - including cleaning stuff and toiletries - and let's assume £150 tops per month for entertainment - activities with the kids etc. That leaves another £450 a month currently "spare" - so where is that going? For context, we're talking about in excess of £5000 a year here - so not a small amount. 

It seems to me as though the main root cause of your issues is that with no budget, and no handle being kept on the surplus (for example to direct it to savings, or to pay down debt) money just gets spent ad-hoc - and then when in any given month there's not sufficient of it to meet your actual needs (because for example a big unbudgeted annual cost arrives) out come the credit cards again - and that is a cycle you need to stop. 

Transferring to 0% deals is a great idea BUT it needs to go hand-in-hand with a plan for then paying down the amount transferred. Minimum payments never make as much inroad as you hope - because they decline as the balance falls - so the better bet is to set the monthly payments to the 0% cards at a set amount slightly above the minimum starting point - that way you have a set amount going out each month, and as time passes you make slightly more impact each month. This ONLY works if you're not using the cards for spending too though - otherwise you risk the set monthly payment being too low, and finding fees and charges being added as a result.

Start with step 1 as already advised - the SOA which will enable you to create a working budget. 

Hil_Hil

Heya,

Firstly, thank you for all of your advice it is really appreciated.  I will have a look at doing the SOA. I am sure with most people with money problems hate looking at their money and hate looking at their bank statements because that is simply me.

A DMP would really help me in regards to having enough money to enjoy my life and give my family what they want but I feel it won't give me the best of both worlds as a mortgage 8 years from now with a DMP seems impossible. I worry about car finance as well as both cars are financed. I always pay but feel it could affect any further finance options in the future.

I will do an SOA and go from there. DMP might be the only thing that forces me to actually pay it back and get out of this mess.

thanks.

Suseka97

You've had plenty of advise regarding doing the SOA and the reasons this will help you to determine the best course of action going forward - so I won't add to that.  I just wanted to pick up on your comment on the belief that a DMP will help to you have enough money to enjoy your life and give your family what they want and also that you feel a mortgage 8 years from now would be impossible with a DMP.

You need to slightly adjust your mindset and really consider why you are in this position.  I'm not judging, if I were it would be a matter of the pot calling the kettle black (been there, done that).  A DMP is definitely an option for many and allows people to have a fixed timeframe for clearing their debts once defaults are applied, because interest and charges stop and you are then tackling the debt capital.

Your disposable income is pretty good, and set to improve by a further £240 per month once you've cleared the loan.  So, you need to start budgeting now (the SOA will help) and look at how you can attack the debts, whilst saving and have a little for the 'nice to have' things.  It shouldn't be about 'want' but 'need' at this moment in time.  Of course you will want to ensure your children are able to enjoy a few treats here and there, but if you could focus on debt freedom for a few years - your financial future will be far more stable.

As for getting a mortgage 'post-DMP', its definitely possible and if you were to do down the DMP route and achieve early defaults (which are a necessary 'must' for all sorts of reasons) then those defaults will have fallen off your credit file by the time you are looking into securing a mortgage.  You should also consider that its not just adverse markers that affect your ability to get a mortgage - but also about affordability.  So if you haven't made a substantial dent in your debt repayments by the time you are looking into mortgages, then you may find it difficult to achieve what you need in terms of borrowing.  But of course that will depend on your incomes at that point as well, which no doubt will have increased and the LTV of the mortgage you are after.  You'll also need to be saving towards that deposit.

So, start with the SOA and then see how you go with that - good luck.

fatbelly

Hil_Hil said:

A DMP would really help me in regards to having enough money to enjoy my life and give my family what they want but I feel it won't give me the best of both worlds as a mortgage 8 years from now with a DMP seems impossible. I worry about car finance as well as both cars are financed. I always pay but feel it could affect any further finance options in the future.

As a rule of thumb, if you're a non-homeowner then you want a dmp to complete in under 5 years. Otherwise you may as well go for bankruptcy (payments for 3 years) or IVA (payments for 5 years).

The nasty marks on your credit file, be they insolvency or defaults, drop off after 6 years so you can look at everything being cleared and a fresh start with a 6-year timescale.

Rob5342

Hil_Hil said:

Heya,

Firstly, thank you for all of your advice it is really appreciated.  I will have a look at doing the SOA. I am sure with most people with money problems hate looking at their money and hate looking at their bank statements because that is simply me.

A DMP would really help me in regards to having enough money to enjoy my life and give my family what they want but I feel it won't give me the best of both worlds as a mortgage 8 years from now with a DMP seems impossible. I worry about car finance as well as both cars are financed. I always pay but feel it could affect any further finance options in the future.

I will do an SOA and go from there. DMP might be the only thing that forces me to actually pay it back and get out of this mess.

thanks.

A DMP isn't about giving having enough money for what you want, its about paying as much as possible off your debts while ensuring you have enough money to cover what you need, To make them work you need to make sacrifices for a sustained period of time which pays off in the end once all your debts have been repaied.

enthusiasticsaver

You need to beware of seeing a DMP as a pain free way of getting rid of debt.  There are consequences and if you intend getting a mortgage in the next 6 years I would think very carefully before going down this route.  If you have £900 spare each month and the loan is shortly to finish then better budgeting would seem to me to be a better option with restrictions stopping you using the cards entirely (cutting them up, taking them out of your purse/wallet) and seeing them as spare money.  An soa will help to see if this is feasible for you though.