Debt Consolidation with a Debt Management Program
You can consolidate your debt by joining a Debt Management Program. These Programs work by consolidating all your credit card debt into a single monthly payment. You will then be making the monthly payment to the credit counseling organization that has organized the Debt Management Program. It will be the responsibility of this credit counseling organization to pay off creditors.
Before the Debt Management Program takes effect, your creditors must have agreed to the arrangement. If it is your non-profit credit counselor that has recommended this Program, creditors will typically agree (this is in their best interest since it guarantees they will be paid).
On enrolling in a Debt Management Program, your entire debt will be wiped off in 5 years. However, most Canadians pay off their Program within 3 months for much needed financial freedom.
So, who is DMP meant for?
- People who are struggling with unsecured debt (that that did not require collateral when you were getting the credit).
- For those with debt that is more than 20% of their income
- For people who are being harassed by debt collectors
Other than credit card debt, there are other types of debt that DMP is good for. These are:
- Retail Store Credit Card Debt
- Unsecured Personal Loan Debt
- Credit Union Unsecured Loans and Credit Card Debt
- Auto Repossession Debt
- Gas Cards
- Non-Government Student Loan Debt
- Past-due Cell Phone Bills
- Past-due Utility Bills
- Medical Bill Debt (some, not all)
- You will clear all your credit card debt in less than 5 years (typically 3 years in Canada) since the monthly repayments are fixed.
- You will be charged 0% or near 0% interest, which is better than most other debt consolidation methods.
- Within 2 years of completion of the Debt Management Program ends, your credit score and credit report will have been completely repaired.
- Most non-profit credit counselling organizations provide free one-on-one help. You will be given relevant budgeting, money saving and debt management tips in workshops and other fora.
- The fact that you will not be dealing with creditors directly has many indirect/intangible benefits such as reduced stress levels and better sleep (which means better health) and improved relationships with friends and relatives.
- DMP is a good option if you don’t want more drastic forms of debt relief such as bankruptcy and consumer proposal.
- This is not a legal process, unlike debt relief such as bankruptcy and consumer proposal.
- This is the only formal debt repayment program that has no permanent record and is completely private in Canada. Your records of the DMP and the debts paid off through the Program are erased from your report 2 years after completion.
- Your credit counsellor will not agree to a monthly repayment you cannot afford, meaning you will get financial freedom even as you are in the Program.
- This solution is not for everyone. Your Credit Counselling organization must convince your creditors that this is the best way to ensure they are paid all their money. Note that creditors will be getting a “pay cut” since you mostly pay the principal only and they may refuse to get on board if they feel you can do debt consolidation through other methods.
- You will have a bad credit score for the duration of the Debt Management Program and for 2 years after the end of the Program.
- If you are using a for-profit credit counselling organization, you will have to contend with large fees (but there is no real reason why you should not be using a non-profit credit counselling organization).
Applicable Interest Rates
Non-profit credit counselling organizations
If you get a good non-profit credit counselling organization, you will get 0% interest rates (with most major creditors) or rates close to 0% (for smaller creditors). Given the 0% or near 0% interest rate, non-profit credit counseling organizations usually charge a small fee for the Debt Management Program to take care of administration costs.
For-profit credit counselling organizations
For-profit credit counseling companies also offer this service, but with higher interest rates since creditors will not allow them to offer lower rates. For-profit companies usually have a large upfront fee (in the thousands of dollars) for the service. You would expect stellar service with this high fee, but in most cases, the service offered does not correspond to the charges. The main reason for this is that most creditors will not work with for-profit credit counselling companies.