A Debt Management Plan (sometimes referred to as a debt management program) is often used by people who have a lot of debt and feel like they will never be able to pay it off. A debt management plan is an agreement between you and your creditors to pay back your debts over a period of time. This can be a good option if you are struggling to make your monthly payments or if you have missed payments in the past.
Consumers often associate the term ‘debt management plan’ with any plan that helps manage debt. While this is certainly what a debt management plan does, debt management plans are actually structured programs offered by credit counselling agencies. In this article, we will be discussing both the formal debt management plan works, and the alternatives available as they are not suited for every circumstance and can be costly.
How Debt Management Plans Work
A debt management plan is an informal agreement between you and your creditors to pay back your debts. A debt management plan is completely voluntary on the part of both you and the creditor. You can choose which creditors you want to include or not include, and likewise, a creditor can ultimately decide not to participate in the debt management program.
Creditors that do participate often reduce or completely eliminate any interest charges and allow you to pay back your debt over a period of time – usually three to five years. Once in place, you will make a monthly payment towards the debt management plan.
The monthly payment will be paid to the credit counselling agency who will then distribute the funds to your creditors according to the amounts agreed upon.
These plans are not a debt consolidation loan – no new money is borrowed to repay the old debt. Instead, your creditors simply agree to new terms on the existing debt.
What Types of Debt Can I Include?
Most unsecured debts can be included in a debt management plan. Most types of unsecured debt can be consolidated into a debt management plan including:
- Credit card debt
- Department store cards
- Personal loans
- Payday loans
- Lines of credit
Not all debts are able to be consolidated into a debt management plan. Secured debts, such as a mortgage or car loan, cannot be part of the debt management plan as these debts are backed by collateral. The same is true for government debt such as student loans and income taxes. You will be required to continue making each monthly payment for these creditors.
Debt Management Plan Pros and Cons
Debt management programs offer a number of advantages and disadvantages that should be considered before enrolling.
- Creditors may agree to waive or lower interest rates and late fees, which can save you money each month.
- One monthly payment is made to the credit counselling agency who then distributes the funds to your creditors. This can make budgeting and keeping track of your debt easier.
- Once the debt management plan is completed, you will have completely paid off the debt included in the debt management program.
- Debt management plans can be costly. You may have to pay a set-up fee as well as monthly maintenance fees.
- A debt management plan will usually take longer to repay your debts than if you were to make the minimum monthly payments. This means that you will end up paying more in interest over the life of the debt.
- Enrolling in a debt management plan will have a negative impact on your credit score as it will appear on your credit report.
Will My Credit Report & Score Be Affected?
Enrolling in a debt management plan will have a negative impact on your credit report and score. The debt management program will appear as a ‘DMP’ on your credit report. While the industry claims that this is not as serious as other items such as bankruptcy or consumer proposal, our experience in speaking with those who have participated in these programs show they have faced similar challenges as those who have filed bankruptcy or consumer proposals.
Furthermore, enrolling in a debt management program may prevent you from getting new lines of credit, such as a mortgage or car loan, as creditors may view you as a high-risk borrower.
You May Have Other Options
If you are struggling with debt, there are other debt relief options available that may be better suited for your situation. These options include:
- Do-it-yourself debt repayment, sometimes referred to as DIY debt solutions.
- Contacting your creditors directly and asking for assistance yourself.
- A consumer proposal (often referred to as a debt settlement program)
If you are unsure of which option is best for you, we recommend speaking with a Licensed Insolvency Trustee (“LIT”). They will review your unique financial situation and provide you with the best options available to help you get out of debt. Feel free to also check out our article on 10 ways to pay off debt faster.
Debt Management Plan vs Consumer Proposal
A consumer proposal (oftentimes incorrectly referred to as a Government Debt Relief Program) is a legal process governed by the Bankruptcy and Insolvency Act. A consumer proposal can only be filed by a Licensed Insolvency Trustee and offers a number of advantages over a debt management plan including:
- A consumer proposal can cut your debt by up to 80%.
- Your creditors are legally bound by the terms of the consumer proposal, if accepted – they cannot refuse to participate or change the terms of the agreement if you keep up your end of the bargain.
- The interest on your debt stops accruing as soon as the consumer proposal is filed.
- You make one affordable monthly payment to the LIT who then distributes the funds to your creditors.
- A consumer proposal can only last a maximum of 60 months (5 years) – meaning you will be debt-free sooner than if you were to enroll in a debt management plan.
- Consumer proposals are generally less severe then a personal bankruptcy, learn about the 9 reasons to file for a consumer proposal over a bankruptcy.
A proposal will also impact your credit score, however, a consumer proposal often has a lower payment which allows for faster savings, credit rebuilding, etc. You can also see consumer proposals vs other debt consolidation options here.
Comparing the numbers – Your Monthly Payment & Total Repayment
If you have $30,000 of debt, and are able to obtain a DMP without being charged interest, you would have an estimated payment of approximately $525 per month for 5 years. This includes the $500 to repay the $30,000 in unsecured debt, and a $25 debt management fee.
If you were to file a consumer proposal for a similar amount of debt, you would pay approximately $150-200 per month for 5 years, based on what we see at our firm.
This amounts to $19,500 to $22,500 saved compared to filing a DMP and saving you hundreds of dollars per month.
Of course, this isn’t always the case and that is why when you are striving to get debt-free you should speak with one of our Licensed Insolvency Trustees.
For Debt Services You Can Trust – Choose Powell Associates Ltd.
If you are struggling with debt, contact Powell Associates Ltd. to explore all of your options. We offer a free, no-obligation consultation to help you understand all of the debt solutions available to help you eliminate debt and regain control of your financial life. If you want to avoid bankruptcy, we can help you understand the alternatives to bankruptcy, including debt management plans.
To learn more or to book your free consultation, contact us today!
Frequently Asked Questions
Can you get a mortgage on a managed debt payment plan?
Most likely, no. A mortgage is a type of loan that is typically given to people who are considered to be low-risk borrowers. If you are currently enrolled in a debt management program, your creditors may view you as a high-risk borrower and may be unwilling to give you a loan.
Can I get credit while in a DMP?
It is possible to get credit while in a debt management program, however, it may be more difficult as creditors may view you as a high-risk borrower.
Can a Licensed Insolvency Trustee help me with a DMP?
No. An LIT does not implement formal DMPs. However, that does not mean they cannot assist you in implementing other debt solutions such as a consumer proposal or bankruptcy.
Can I file a consumer proposal or bankruptcy if I am enrolled in a DMP?
If you are currently enrolled in a DMP and are struggling to maintain the payment, you may be eligible to file a consumer proposal or bankruptcy. In fact, a consumer proposal or bankruptcy may be able to help with more than just the debts you had included in your DMP. However, we recommend speaking with your Licensed Insolvency Trustee first as they will be able to assess your unique situation and advise you on the best course of action.
This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.