What is a Debt Management Plan and How Does it Work?
If you’re looking for a solution that will help with debt, then a Debt Management plan might be the way forward.
Helping you to prioritize and keep track of your monthly payments, it will ensure that you’re debt-free quicker.
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But what exactly is a Debt Management Plan and how can it work for you?
A Debt Management Plan (often referred to as a DMP), is a program that’s offered by credit counselors.
A plan that lays out how you’ll repay all of your unsecured debts to your creditors, it consolidates them so that they are within one manageable and affordable monthly payment.
Spread over a period of up to 5 years, along with budget-friendly payments, they also typically offer favorable interest rates (in most cases, zero interest).
These monthly payments are made directly to your credit counselor, who will then distribute them to your creditors accordingly.
Easing the financial burden and making the process more efficient, a credit counselor is invaluable in the process from start to finish.
What are the steps taken?
Each individual’s Debt Management Plan will be unique to them.
Therefore, as part of the process, you’ll meet with your credit counselor who will analyze your financial situation and what debts you owe.
During this stage, they will consider whether:
- A Debt Management Plan is right for you;
- The likeliness of your creditors agreeing to the plan;
- How much you can realistically repay each month.
After this initial meeting and if it’s decided that a DMP is the most suitable option for you, your credit counselor will negotiate with your creditors.
This is done as a way of finding a repayment plan that works not only for you, but for them so that the debts are effectively eliminated.
Once agreed, your credit counselor will start to receive the payments from you and will disperse them to the creditors.
Who can benefit from a Debt Management Plan?
Debt Management Plans are ideal for those who are looking for a method to repay all of their debt in full in a way that’s affordable to them.
It’s also suitable for individuals that are wanting to improve how they will manage their money by being guided towards a fixed payment schedule and those that don’t qualify for a debt consolidation loan.
What are the key benefits of a Debt Management Plan?
There are several key benefits that come with seeking a Debt Management Plan, including but not limited to the following:
- Creditors can no longer harass you to repay the debts that you owe;
- Your payments will be consolidated into one affordable monthly payment;
- A clear path towards regaining financial stability;
- You’ll pay less or no interest on the repayments;
- It’s completely your choice when you start the process;
- You’ll have invaluable advice and support throughout the process from your credit counselor.
Top things to consider with a Debt Management Plan
Before you take the leap and start a Debt Management Plan, there are certain downsides that you should take note of.
Although it can be very effective, it’s not always the best debt relief solution for everyone, so it’s important to look at these disadvantages and to seek professional advice from a credit counselor prior to agreeing to it.
Here are the key cons that you should keep in mind:
It will be reflected on your credit report as an R7 note – this could have an impact on your credit for up to 6 years afterwards.
However, this is arguably better than filing for bankruptcy or not making any repayments at all.
The same impact as a consumer proposal, it’s a good idea to compare these two options from the start.
- It won’t cover all types of debt;
- You’ll need to keep up with the repayments each month with no exceptions until all of the debt is covered;
- It’s not a legally binding program – instead, it’s a voluntary agreement that’s created between the debtor and the creditor;
- It won’t provide you with 100% debt relief, you’ll have to do your part to ensure that the repayments are made;
- They are typically only appropriate for a handful of smaller unsecured debts – it is not suitable for student loans, payday loans, tax debts or other complex debts;
- It won’t automatically stop wage garnishments.
Which should you choose? A Debt Management Plan or a Consumer Proposal?
When looking for ways to repay your debt, you might come across these two popular choices.
Both known as debt management programs, they are often used as a way of avoiding having to file for bankruptcy.
Designed to reduce interest, support your path to a better financial future and typically require you to make one monthly repayment, they have several similarities.
However, when looking at both options it’s important to also understand the differences between them to ensure that you’re choosing the best option for you.
The assistance of a Licensed Insolvency Trustee (LIT)
Which one is court approved?
As aforementioned, a Debt Management Plan isn’t a legally binding program. Whereas a Consumer Proposal is a process that’s approved by the court.
How much debt you’ll have to repay
One of the biggest reasons why people tend to opt for a Consumer Proposal over a Canadian Debt Management Plan is that with the latter, you’ll have to repay 100% of what you owe.
Whereas with a Consumer Proposal, you might only be required to repay a percentage of what you owe.
Negotiating the outstanding debt
As mentioned above, the outstanding balances within a DMP must be repaid in full.
However, with a Consumer Proposal, you may be able to negotiate on the remaining balance if the debt is unsecured.
The affordability of repayments
Another main reason why a Consumer Proposal is perceived to be the better option is that it allows for lower monthly repayments.
This means that you’re able to budget more effectively and pay off your debt in a way that’s affordable to you.
By seeking professional advice from the start you’ll be able to decide which option is better for you and what they both entail.
However, from the above it’s clear to see that if you’re unable to meet monthly repayments and owe unsecured debt, a Debt Management Plan can prove to be invaluable in the journey towards getting a fresh financial start.
But, if a Debt Management Plan doesn’t fit your financial circumstances and you’re looking for an alternative option, then perhaps a Consumer Proposal is the better option for you.
Whichever step you take, as long as you can consolidate your debt and get back on track with your budgeting, you’re on the path to success.
Get in contact with Bankruptcy Canada today
If you want to find out more about starting a Canadian Debt Management Plan or are looking for further advice surrounding debt relief, don’t hesitate to get in contact with one of our trustees today.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
How to Amend a Consumer Proposal
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
Consumer Proposal Eligibility
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?