What is a debt management plan?
A debt management plan enables you to consolidate debts with the help of a credit counselling agency. You can consolidate all of your payments into one single monthly payment. This solution is most commonly used for credit card debt.
You’ll work with a credit counsellor who will guide you through every step of the way. They can negotiate an interest-free period or interest rate reduction on your debts.
How does a debt management plan work?
A credit counsellor plays a significant role in a debt management plan. They will work with you to create a payment schedule that works for you and will send the proposed plan to your creditors for them to accept.
It is possible to reduce or eliminate interest rates and fees on your debts through a debt management plan.
You make a monthly payment to the credit counselling agency, and they will distribute the funds to your creditors.
It is worth noting that you can’t eliminate debts in a debt management plan. Part of the credit counsellor’s role is to ensure that you can fully repay your debts in the agreed period.
During the program, you’ll be supported by your credit counsellor, and you’ll pay fees to the credit counselling agency for administering the plan.
Often credit counselling agencies favour a debt management plan because the creditor will pay them a percentage of the debt recovered.
How long is a debt management plan?
Typically, you can complete a debt management plan and pay off your debts within three years.
What are the advantages of a debt management plan?
Your credit counsellor will work with you to reduce your interest rates or eliminate them entirely in a debt management plan. This benefit allows you to pay off your debts sooner, potentially in as little as three years.
A debt management plan is a straightforward process. You can choose whether or not all of your debts are included in the plan.
From there, you make your one affordable monthly payment to the credit counselling agency, which will liaise with your creditors and make repayments to your creditors on your behalf.
A debt management plan allows you to get out of debt faster than paying the debts individually. Lastly, you can avoid serious issues such as collection proceedings or bankruptcy, further damaging your credit.
What are the disadvantages of a debt management plan?
Of course, like all debt relief solutions, a debt management plan has some disadvantages.
Firstly, it’s a voluntary agreement, so your creditors must agree to the program before you can proceed. As it’s an informal debt solution, your creditors can withdraw from the program at any time.
Any creditors that don’t participate can continue to garnish your wages, and collection agencies may still pursue you for the debt owed.
Some debts cannot be included in a debt management plan, such as student loans, tax debts, mortgages and car loans.
There is usually a specific timescale for debt management plans, requiring you to pay off your debts within 3-5 years.
Your credit report is updated to tell lenders that you are making regular payments through a debt management plan. This appears on your report for two years after completing the plan. As a result, this can impact your credit score.
Some for-profit credit counselling agencies charge large fees. Always use a non-profit agency accredited by a reputable provincial or national association, such as Credit Counselling Canada.
How much does a debt management plan cost?
Often there is an initial set-up fee and a monthly fee in a debt management plan, so make sure the money you save from interest reductions doesn’t just go towards these fees.
As a debt management plan is voluntary, your creditors may refuse your settlement offer. If this happens, you may still need to pay fees.
Does a debt management plan affect my credit score?
Like most debt relief solutions, a debt management plan will hurt your credit.
Your credit score will decrease, and your credit report will note that you’re making regular payments through a debt management program or credit counselling agency.
While this negative information stays on your credit report for two years, making payments on time and reducing your debt will help your credit long term.
Once you’ve completed a debt management plan, there are many ways to repair your credit score.
Source: Equifax: Credit Counselling
Can a debt management plan stop bailiffs?
A credit counsellor is responsible for administering a debt management plan, but they have no legal power to stop creditor action.
A debt management plan is a voluntary agreement, so creditors do not have to accept the plan. If they disagree, creditor action and collection action may continue.
Debt management plan Canada: Is it right for me?
A debt management plan could be the right choice for your circumstances, but always carefully research your options.
When approaching a credit counsellor, always make sure it’s a legitimate, non-profit agency accredited by a reputable association.
You can also get free impartial advice from a Licensed Insolvency Trustee, a professional licensed and regulated by the Office of the Superintendent of Bankruptcy.
A trustee will help you compare each debt relief solution and advise on the best route for you.
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