When your debt becomes more than you can handle, a good debt management program can help you pay off your debt sooner and get back on track.
Credit counselling agencies and bankruptcy trustees both offer debt management help, each with their own advantages and disadvantages.
Two of the most common options are a debt management plan and a consumer proposal.
Debt Management Plan
A debt management plan is a program to repay your debt with help from a credit counselling agency. It’s a voluntary agreement between you and your creditors.
When you first meet with your credit counsellor, they’ll review your debt, income, and monthly expenses, and help you develop a monthly repayment plan that fits within your budget. In this scenario, you make a single monthly payment, and your creditors agree to waive most or all interest, helping you pay off your debt faster.
A debt management plan:
- does not need to include all of your creditors,
- is not binding on your creditors,
- cannot stop a garnishment order–the creditor must agree to lift the garnishment, and
- lasts no more than five years.
For example: if you owe $12,000 on four different credit cards, your credit counsellor will negotiate with each credit card company to accept a payment plan of $250 per month for four years. If they agree, your counsellor collects your payments each month, then disburses the money to your creditors.
Debt Management Plan Pros and Cons
A debt management plan has several advantages:
- Most creditors agree to waive most or all of the interest.
- The maximum repayment period is five years, which is much faster than repaying debts on your own.
- With only one payment each month, your budgeting becomes simpler, and you can stop worrying about managing several payments.
- You don’t have to talk directly to your creditors–your counsellor negotiates on your behalf.
- It can help you pay off credit card debts and bank loans, and can also work with payday loans and finance company loans.
Disadvantages of a debt management plan:
- Because it is voluntary, it’s not legally binding on all of your unsecured creditors, meaning they can opt out.
- You have no protection from being pursued by creditors–collection agencies can continue to call, and your wages can still be garnished.
A debt management plan is a great way for many Canadians to avoid personal bankruptcy and get out of debt, but it’s not for everyone. If you can’t afford to repay your debt in full, or if you need to stop a wage garnishment or other legal proceeding, a consumer proposal might be a better option for you.
This option includes all the advantages of a debt management plan, plus:
- Immediate protection from unsecured creditors.
- The ability to settle your debts for less than you owe.
In the case of the example above, your consumer proposal administrator will contact your creditors to negotiate a settlement for your $12,000 credit card debt in exchange for monthly payments to the trustee of perhaps $125 per month for four years (compared to $250 in the debt management plan). Your trustee then distributes the funds to your creditors.
Debt management plans and consumer proposals have the same impact on your credit rating, and remain on your credit report for three years after your payments are complete. In this option you also receive credit counselling, so both options help you develop budgeting and money management skills to better prepare for the future.
Debt Management Help
If you’re having trouble managing your debts, you can talk to a professional and get help exploring your options. For a free evaluation, contact an advisor today.