What Is A Debt Management Plan?
A debt management plan allows you to consolidate all your accounts into a single payment every month, which is then distributed to your creditors. A third party, usually a debt management company, sets up a debt management plan.
It allows you to pay the debts you can afford and cater to your living expenses, and then the remaining money is shared fairly among all your creditors who agreed to the plan. In most cases, you must make a monthly payment to the debt management provider, and then they will forward the right amount to each creditor you owe. We have everything you should know.
This form of debt relief may work for you, depending on your financial situation. The goal is to pay off your debts and have minimal impact on your credit score. The point of coming up with a plan in the first place is to ensure that you are not left without any money or feeling financially overstretched.
A debt management plan is what allows you to secure your living expenses. It involves working out a suitable budget that ensures all the money you make goes into paying debts and keeping you up-to-date with household bills and other expenses.
When you speak to a company offering debt settlement in Toronto, they will devise a suitable plan for you. The expert will determine what you can realistically pay your creditors and then negotiate with them to accept the debt management plan. Every month, you must pay through the plan. The company or charity will then pay your creditors according to the plan. Sometimes, the company you work with to set up your debt management plan will negotiate with your creditors to reduce your payments.
One of the key reasons a debt management plan is a viable solution to get out of financial problems is that it is a form of debt consolidation in Toronto that allows you to make a single monthly payment that you can realistically afford. You are never tied to the debt management plan. You can leave whenever you feel it doesn’t work out for you.
Sometimes, all the money you pay monthly goes into paying off your debts. Debt management plans are usually very flexible since they are customized to suit your unique financial situation. The plan can be adjusted to fit any changes in income or living situation.
Like all other forms of debt relief, a debt management plan comes with risks. You may notice that the debts will take longer to pay since you’ll be making lower debt payments. Furthermore, you may have additional charges and extra interest to pay on top of your debt, meaning the amount you repay in the long run will be higher. Your credit score may also be affected when you agree to a debt management plan.
How A Debt Management Plan Works
A debt management plan is not the same as a debt settlement program. A settlement program only repays a percentage of your debt. A debt management plan allows you to repay your debts more efficiently.
Find Out If You’re Eligible For A Debt Management Program
The first step of enrolling in a debt management plan is determining whether you’re a good fit. This means requesting free credit counseling from a nonprofit consumer credit counselling agency, including budget and debt evaluation. A counsellor will look at your unsecured debt, including the applicable interest rates, credit score, and budget, to determine where your debt stands. Next, we’ll discuss all the options to help you get out of debt.
If a debt management plan is best, you can immediately enroll through a credit counselling organization. Before the consultation ends, your credit counselor will give you an estimated monthly payment amount.
Why A Debt Management Plan Is Only Suitable For Some People
These plans are usually the best suited for individuals who seek to pay off all their debts and access lower interest rates. A debt management program is primarily useful for people who want to keep their payments up-to-date but may struggle to earn enough money to live on.
Debt management programs provide the most significant benefit when a consumer’s credit card debt is still with the initial creditor before the involvement of a third-party collection agency. A debt management plan only works if you can make the debt payments. This program often lessens your monthly credit card payment, but you still have to pay some monthly amount to cater to your other needs.
What Makes You Ineligible For A Debt Management Plan?
You must have a regular income source to enroll in a debt management plan. Otherwise, you can’t make your monthly payments. If you and your advisor cannot create a budget that allows you to make your debt payments reliably, you might not be eligible for enrollment.
Additionally, the creditor will request that the credit counselling agency confirm that there are no other options to repay the debt. For example, a homeowner may have to cash out the accumulated equity rather than enrol in the debt management program. In case you have some savings in a Registered Retirement Savings Plan (RRSP), you might first need to withdraw it and pay off your loans before enrolling.
Enroll In A Debt Management Plan
When you decide to enroll, your credit counsellor will request certain information regarding your debts.
- Your Name
- Account number
- Current balance
- Account status (current, delinquent, or debited)
- Check your monthly payment amount
This information lets the counsellor determine whether the payments fit your budget. The next step involves calling your creditor to commence negotiations. During negotiations, the agency has three goals:
- Convince the creditors to accept lower debt payments through a debt management plan
- Reduce or remove the APR applied to the loan balance
- Stop the accumulation of additional fines and fees
After submitting a consumer proposal, all creditors must agree to let the agency include the outstanding debts in the debt repayment program before the plan can formally begin.
If each creditor agrees to the terms of the consumer proposal, you will receive an acceptance letter from each creditor. You must continue to make minimum deposits into your account during this registration period.
Your credit counselling agency will notify you when all creditors have agreed to the terms and when payments for the program will officially commence.
Which Debts Can Be Included?
A debt management plan reduces high-interest credit card debt. These include general-purpose, gas, charge, and store credit cards. Most major financial institutions and retailers have well-established relationships with credit counselling agencies. Therefore, we typically allow these debts and include them in the program.
However, if a debt has no collateral and the creditor accepts the consumer proposal, you can include other debts that need to be consolidated, including:
- Debts in collections
- In-store credit lines
- Debt consolidation loans
- A personal line of credit (LOC)
- Unsecured personal loans
Debts That Cannot Be Included
You cannot include debts that have collateral in a debt management plan. These include a mortgage, home equity line of credit (HELOC), auto, or home equity loans. Student loans cannot be included in the plan.
Adhere To The Debt Repayment Plan To Become Debt-Free
Once the program commences, you will make one affordable monthly payment to the credit counselling agency. It then distributes payments to creditors according to the agreement. Prices are fixed, so managing the payments within your budget is easy. You can work with your credit counsellor to find valid payment dates when you need to receive your income and pay the remaining bills.
While participating in the program, all credit cards or lines of credit entered into the program will be frozen. This means that new charges cannot be applied to these cards. Your credit report shows you are making payments through a debt management program.
You cannot open a credit card while participating in the program. While under the program, you may obtain a secured credit facility, such as a mortgage or car loan. However, this will depend on your credit score.
A credit counselling agency can help you manage debt to achieve financial stability without relying on credit cards as you progress through the program. You can also access financial literacy resources to help you practice better financial habits in the future. That way, you’ll be better prepared to avoid future debt problems after graduation.
What Happens If You Leave The Program?
Enrollment in a debt management program is completely voluntary. If your circumstances change, you can opt-out at any time. For example, if you can no longer keep up with your payments and decide to file for bankruptcy, you can try a debt consolidation program. You are allowed to do that. You can also drop out of the program if your financial situation improves. For example, you can leave the debt management plan if you get a new job or a salary raise and can afford to pay the debt independently.
If you leave the program, the creditor will likely restore the original interest rate and previous charges. However, your account will show all payments made under your debt relief solution.
Costs of a Debt Management Plan
There are two primary costs associated with a debt management plan:
- Discounted interest fees on credit cards you sign up for
- Credit counselling agency fees for setting up and managing your monthly DMP interest rates
Interest Rates
In many cases, creditors will eliminate the APR applied to your debt. However, some creditors will only agree to reduce interest payments rather than eliminate them. You can usually expect your interest rate to reduce by 0-5%. Interest paid while you are in the program will be paid to the creditors of the respective accounts.
Credit Agency Fees
Nonprofit credit counselling agencies strive to keep fees as low as possible. However, there are some costs for an agency to set up and manage your plan. This means you must pay a one-time setup fee and then a monthly management fee.
All fees are rolled into your plan’s monthly payments to ensure you can benefit from the program. It is important to note that not all credit counselling agencies are nonprofits. For-profit organizations typically charge higher fees for their services. So, work with a not-for-profit agency before signing up for a debt management plan. This helps keep costs as low as possible.
Whether A Debt Repayment Plan Will Affect Your Credit Score
Participating in a debt management program will have a significant negative impact on your credit rating. All debts included in a debt management plan will be rated R7 on your credit report. You will see this notation each time you repay your revolving line of credit under an adjusted payment plan.
This notation typically remains on your credit report for up to two years after you exit the program. An R7 notation tends to have a negative impact on your credit score, as it indicates that you have not been able to repay your debt according to a standard repayment plan.
How much a debt management plan affects your credit rating depends on your existing credit history and the number of other negative items that appear on your credit report when you sign up. The impact will be more significant if your credit score is higher at the time of enrollment in the program compared to consumers who have previously suffered other penalties.
The Pros And Cons Of A Debt Management Plan
The main benefit of a debt management plan is the savings it brings. By minimizing interest, you can pay off your debt faster and more efficiently, helping you save money. Balances that would have taken years or even decades to clear can be paid in 60 monthly payments or less. A debt management plan can reduce your total credit card payment by 30 to 50 percent and potentially lower your monthly payment.
However, you should be aware of several drawbacks to debt management plans. Your credit report will show that you are repaying your debts according to an adjusted payment plan. This information will remain on your report for two years after completing the program. You will also no longer be able to use any credit cards you have enrolled in the program. The card will be blocked as soon as the payment is complete.
Pros
- A Debt management program gives you a sense of accomplishment since you repay everything you owe
- It offers debt solutions even for high debt amounts, even above $100,000
- In most cases, the APR applied on your loan is reduced or even eliminated
- You will only pay one affordable monthly installment instead of juggling multiple credit card debts
- On average, your monthly installment will reduce by 30–50 percent
- In an average of three to five years, you will be out of debt
- Compared to other ways of managing debt, this debt relief option causes less damage to your credit score
Cons
- While under a debt management plan, you cannot use the credit cards enrolled in the plan or apply for new cards
- The credit card balance will only be closed when you pay the loan in full
- The repayment plan details will remain on your credit report for up to two years after completing the program
Specialized Debt Management Programs
You can access specialized debt management options for:
Couples
If you and your family members or spouse have debts you want included in your plan, you have to enter them jointly. Your credit counsellor can help you create a plan that covers any jointly held debts you want to include. The two spouses may also include debts they individually have. You’ll make monthly payments together, and your credit counsellor will guide you in creating a shared household budget that works for you.
Military Personnel
A good few credit counselling agencies may give discounts to members and veterans of the Canadian Armed Forces. Your agency may lessen or waive plan setup fees and monthly management fees. If you have worked for or currently work for CAF, check to confirm if your agency offers discounts before registering.
Whether A Debt Management Program Is Good For You
Like all debt solutions, debt management plans are not suitable for everyone. If you can afford to pay off the debt yourself, it’s a good idea. This will help you avoid negative entries in your credit report. Also, a debt management plan may not be helpful if you can’t make the monthly payments. If you’re unemployed or can’t afford to pay off your debts, this solution probably won’t work.
A debt management plan is designed to help Canadians who have a challenge getting out of debt on their own but are determined to pay it off. Your counsellor will work with you to set a monthly payment you can afford.