BankruptcyCanada.com trustees help their clients deal with debts.
We often find that people can confuse debt management and debt reduction plans and assume that they are the one and same debt relief solution.
In reality, it’s imperative to understand the differences between these debt solutions.
Our trustees help compare debt management vs. debt reduction plans to figure out which one can provide the debt relief you need and let you achieve your financial goals.
We believe that everybody can get a fresh financial start as long as they can find the right approach to manage or reduce their debt.
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Debt management vs debt reduction: The core principles
As a rule of thumb, debt management and debt reduction solutions provide a different approach to settle your debt.
Debt management consolidates your debts into a manageable single payment plan.
The single payment plan is typically arranged as a monthly payment.
When you choose a debt management program, you will repay your debt in full.
However, you often benefit from an interest rate reduction as a result of combining all your debts together.
More often than not, the interest rate decrease is sufficient to make debt repayment affordable.
A debt reduction plan reduces the debt to a more manageable amount that you can afford to pay.
The payment plan consolidates all your debts into one single monthly payment too.
However, when the debt reduction plan is complete, you will have only repaid a portion of the money you owe.
Debt management plan: Pay back your debt in full
As explained, a debt management plan is a debt consolidation process that consolidates all the payments.
Most creditors agree to reduce interest down to 0% in a debt management plan, which means that from a debtor’s perspective, you don’t accrue any further cost outside of the money you owe.
Debt management plans can get you out of debt within 5 years, depending on your payment abilities.
Your debt management advisor will assess your financial situation to define which amount you can afford to repay on a monthly basis.
The debt being repaid in full, a debt management plan doesn’t affect your credit report to the same extent as other debt relief plans.
However, the accumulated debt will still affect your credit rating.
Debt reduction plan: Pay back only a portion of your debt
A debt reduction plan is a popular strategy to restructure a debt you can’t afford to pay in full.
With a reduction plan, you can cut down the amount you owe creditors and lenders by as much as 70%.
It is worth noting that creditors may not be willing to reduce your debt by that much, depending on the age of the debt and the balance you owe.
Your debt reduction plan can last up to 5 years, after which the debt is settled if you have met the agreed payment plan.
It will also appear in your credit report as a debt settlement plan.
However, the effect on your credit score can be beneficial, as partial debt repayment can put you in a better position to rebuild your credit rating.
Still can’t afford to repay your debts?
Debt management and debt reduction plans are some of the possible solutions to tackle your debt.
However, if you can’t afford to repay debts, a trustee can suggest filing personal bankruptcy to obtain debt forgiveness.
Compare debt management vs debt reduction for your financial situation with the help of a trustee who can provide confidential and objective debt relief advice.