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Can A Debt Management Plan Get You Back On Track?

Paying off multiple debts at once can be challenging. It’s easy to feel like you’re not progressing even when making all your payments. In these circumstances, a debt management plan might be beneficial. The phrase “debt management plan” can simply mean a strategic way to manage your debt, but it actually refers to a specific method to eliminate it. Here, we’ll look at what a debt management plan is, how it can benefit you, its drawbacks, and why other alternatives could be better.

How to Manage Debt

There are two options worth considering if you can manage your payments but find money is tight, or you’re making payments but your debt is not reducing. The first is debt consolidation, and the other is a debt management plan. Both will allow you to pay off the amount you owe.

Debt Consolidation

A debt consolidation loan involves opening a new credit product like a loan, line of credit or mortgage to pay off your debts. It doesn’t reduce the amount you owe, your fees or your interest rates. The proceeds from the new loan will pay off your existing creditors, so you no longer owe them money. Instead, you’ll now make payments to the lender(bank) that gave you the loan. You’ll have one payment instead of several, and you usually pay off the loan in five years or less.

When you apply for a new loan, line of credit or mortgage, the lender will check your credit rating and may confirm your employment and income to make sure you can afford the payments. If you have poor credit, insufficient income or lack job stability, you may not qualify for a debt consolidation loan. 

Debt management plan in Canada

A debt management plan aims to help you pay off your debt with one payment. It differs from a consolidation loan because it can reduce your debt by lowering your fees and interest rates.

To discuss a debt management plan,  you must make an appointment with a credit counsellor to discuss your options. The credit counsellor will work with your creditors to determine if they’ll accept a debt management plan and try to reduce or eliminate the interest and fees you owe. If your creditors accept the plan, you’ll pay the credit counselling agency monthly, which will then distribute your payment to each creditor— However,  keep in mind that the agency also includes the fees they charge in your payment.

The steps you need to take to put a debt management plan in place are:

  • Make an appointment with a reputable credit counselling agency.
  • Bring all your paperwork relating to the amounts you owe, such as loan, credit card and line of credit statements.
  • You must be able to manage the payment, so the credit counsellor may ask you to bring documents confirming your income, like a pay stub.

Pros and cons of debt management plans

Before deciding whether this will be the best solution for your debt, you should be aware of the pros and cons. 

Pros

The advantages of a debt management plan are:

  • You have one monthly payment.
  • They can lower the amount you owe if the interest and fees are reduced.
  • You can be paid off in five years or less if you can make the payments
  • There’s no public record of your debt management plan.
  • Credit counsellors will work with you to develop a budget to avoid going back into debt.
  • You can include a high amount of debt, sometimes up to $100,000.

Cons

There are things to be aware of before you decide to use a debt management plan:

  • You still must repay 100% of your debts and be able to manage the payments.
  • The fees may be higher than you’ll save with an interest rate reduction.
  • Some debts are excluded, like secured debts, debts to the Canada Revenue Agency, support payments in arrears and student loans. 
  • Debts in collections and payday loans may also be excluded.
  • Participation in the plan will freeze your credit cards, so you can’t access them.
  • A note will appear on your credit report and stay for two years after you pay off your debts.
  • It’s not legally binding.
  • Your creditors don’t have to accept it.

Before you accept a debt management plan, be sure to find out:

  • Which debts do they include?
  • How much are the fees?
  • How long will it take to pay off the plan?
  • What happens if you can’t manage the payments?

These plans often work very well for people who can make payments. Some credit counselling agencies report that 90% of their clients enrolled in the program successfully meet their obligations. 

Debt Management Plan Alternatives

What are your alternatives if your financial situation doesn’t meet the criteria? Fortunately, there are a few options, depending on your goal. 

Life can throw curve balls like an illness, disability, job loss or divorce, leaving you unable to repay your debts. If your income doesn’t support a consolidation loan or debt management plan, you can consider a debt settlement, Consumer Proposal or Bankruptcy.

Debt Settlement

A debt settlement offers your creditors a lump sum payment for less than you owe. In exchange for getting a portion of the amount you owe in a lump sum, your creditors write off the balance of your debt. They may agree if they believe getting some of their money back is better than getting none. You can negotiate a debt settlement on your own or hire a debt settlement company.

This approach can work but may offer you only a few advantages because:

  • Debt settlements are not legally binding.
  • A settlement can negatively affect your credit rating.
  • Your creditors don’t have to accept a debt settlement.
  • You need the money upfront or will have to make payments to a debt settlement company.
  • Debt settlement companies can charge high fees and be unable to deliver the results you want.
  • Debt Settlement companies are not government-licensed debt advisors.

Consumer Proposal

A Consumer Proposal is a government-approved debt relief program. It offers a legally binding, effective way to get out of debt. Consumer Proposals deal with unsecured debt, which includes amounts you may owe to the Canada Revenue Agency. It can reduce the amount you owe creditors by up to 80%, make your payments manageable and allow you to keep your assets.

A Licensed Insolvency Trustee (LIT) will submit a Consumer Proposal on your behalf. You’ll make one monthly payment to your LIT, who then distributes the money to your creditors. You can repay your debt in up to five years. 

A Consumer Proposal will affect your credit score, but your LIT will offer guidance on how to manage finances and rebuild your credit rating.

Bankruptcy

If your payments are more than you can repay, you may consider filing for Bankruptcy. Bankruptcy is another government-approved debt relief plan that you need a LIT to file on your behalf. Filing for Bankruptcy is a legally binding solution that will eliminate your unsecured debt, typically in less than 12 months.

If you file for Bankruptcy, it will affect your credit rating. You may need to use some of your assets to repay your creditors, but each province has a detailed list of what you can keep. Your LIT will walk you through the process to ensure this is your best option before proceeding. 

Is a Debt Management Plan Right For You?

Finding the right solution for your debt can be challenging without professional advice. A debt management plan can be a good choice depending on your circumstances, or it might fail to meet your goals. Consulting a Licensed Insolvency Trustee will ensure you get the expertise you need.

Our Licensed Insolvency Trustees at Allan Marshall and Associates are licensed and regulated by the federal government. We offer government-approved solutions for your debts. Contact us online or call  1-888-371-8900 for a free consultation. We’ll work with you to find the best debt relief option so you can eliminate your debt and take control of your finances.

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Amanda Sherwood

Amanda started with Allan Marshall & Associates Inc as an Estate Manager in 2008 where she learned and gained valuable knowledge about the industry. In 2022, Amanda received her Chartered Insolvency & Restructuring Professional (CIRP) designation and attained her license as a Licensed Insolvency Trustee (LIT)