Understanding Debt Management Plans and Debt Settlement: A Comprehensive Comparison
The burden of debt is a reality that many Canadians grapple with daily. Falling behind on monthly payments can make it seem like an uphill battle with no end. However, there are strategies available to help navigate this financial quagmire. Two of these solutions are debt management plans and debt settlement. This article extensively compares these two strategies, providing insights on their advantages, disadvantages, and impact on credit reports.
Debt Management Plans: An Overview
A Debt Management Plan (DMP) is a structured repayment strategy primarily targeted at credit card debt and overdue bills. It is implemented with the aid of a credit counselling agency. A credit counsellor reviews your budget and formulates a monthly payment schedule to help you catch up on payment arrears and repay all your debts.
Contrary to what many think, a DMP is not a debt consolidation loan – you don’t get a new loan to pay off existing creditors. Instead, you make a single monthly payment to the credit counselling agency, who then allocates your payments to the creditors included in your program until your debt is fully cleared.
Although a credit counselling agency can help negotiate to reduce interest charges, they cannot settle your debt for less than you owe.
Debt Settlement: What it Entails
Unlike a debt management plan, a debt settlement solution implies that you won’t have to repay all the money owed, and your monthly payments are likely to be significantly lower.
People who can’t afford to pay their debts in full often opt for debt settlement. They need a company to negotiate on their behalf with creditors to pay less than they owe but what they can afford.
Two primary ways to achieve debt relief through debt settlement in Canada are through a for-profit agency or a consumer proposal. However, for-profit debt settlement companies often have a success rate of less than 10%, with a majority of their clients paying fees and leaving before ever settling with creditors.
On the other hand, a consumer proposal is a debt settlement program filed with a Licensed Insolvency Trustee. It is increasingly becoming a popular route for debtors to manage their debts and avoid bankruptcy.
Essential Similarities and Differences
While both options help to avoid bankruptcy, they yield different outcomes. A DMP is a suitable solution for consumers who can afford to repay their debts but need help organizing them in a single monthly payment. However, debt settlement is designed to forgive or erase some of the debt because the debtor cannot repay everything they owe.
Moreover, a DMP is more costly as you are required to repay 100% of what you owe plus a 10% fee to the credit counselling agency. In contrast, when you settle debts through a Licensed Insolvency Trustee, you pay a percentage of what you owe – usually as low as 35% of your total debt, but the actual amount depends on your financial situation.
Both solutions deal with unsecured debt, but a Licensed Insolvency Trustee can settle a broader range of debts than a DMP. Both programs will also have a similar impact on your credit report.
Common Advantages
There are some common benefits to working with an accredited professional when seeking debt help:
- Single monthly payment, making it easier to manage.
- Ability to stop collection calls from creditors enrolled in the program.
- Debts included in the plan will be cleared when you finish the plan.
- Ongoing budget counselling and financial advice.
Disadvantages of a Debt Management Plan
A DMP will not work for everyone as there are some disadvantages:
- Your debts won’t be written off and must be repaid in full.
- Creditors can’t be compelled to participate, and they may still contact you asking for immediate payment.
- If you have a lot of debt, payments can still be expensive as you must repay all your debts, plus a fee.
Drawbacks of Debt Settlement
While a consumer proposal allows you to repay your debts in less time and avoid bankruptcy, it’s not for everyone.
- You are required to include all unsecured debt in a consumer proposal.
- You will be required to surrender your credit cards.
- You must be insolvent to file.
Impact on Your Credit Report
Both a debt management plan and a consumer proposal will affect your credit. A note will appear in the public records section of your credit report, and the debts included in your program will receive an R7 rating.
Working with a Licensed Insolvency Trustee
To submit a consumer proposal to your creditors, you need to contact a Licensed Insolvency Trustee and complete a legally binding process. The trustee will assess your financial situation and develop a proposal. No payments or fees are required until the proposal is filed with the government, and you receive full protection from the creditors.
The Bottom Line
Both debt management plans and debt settlement via a Licensed Insolvency Trustee can help you manage your debt. If you have the necessary income to continue to pay your debts, a debt management plan might be the right option for you. However, if you’re looking for debt relief because you can’t pay back everything you owe, talk with a Licensed Insolvency Trustee about how a consumer proposal can improve your financial situation.
Keep in mind, the best solution is the one that meets your unique financial needs and circumstance. Therefore, it’s crucial to make an informed decision after considering all factors and possibly seeking professional advice.
