Continuing in our Debt Management Series, we now have a better understanding of what a debt management plan is. Today we will talk more about debt management plan pros and cons and what other options you may have.
Deciding if a debt management plan, or any other debt relief option, is right for you requires a careful consideration of your individual situation. Make a list of your debts, how much you owe and how much you think you can afford to pay each month. With that information in mind, consider these advantages and disadvantages of a Debt Management Plan (DMP).
Debt Management Plan advantages
- A DMP is an informal arrangement with your creditors that allows you to avoid bankruptcy or other insolvency proceedings.
- You make one lump sum payment to your not-for-profit credit counselling service agency and the monthly payment is usually less than you are paying now.
- Creditors may freeze or waive interest payments reducing the total amount you will have to repay. Often they will only agree to waive interest at the end of the plan assuming you have made all of your monthly payments on time.
- A DMP may have less of an impact on your credit score (assuming you make your payments regularly) although a note is usually placed on your credit report stating that you are paying your account through a debt management plan.
- If you choose your credit counsellor carefully, you will be able to take advantage of budgeting and credit management education to help you manage your finances better once your DMP is complete.
Debt Management Plan disadvantages
- A DMP is an informal arrangement. Creditor participation is entirely voluntary and they can change their mind.
- It will not stop wage garnishments and other court proceedings.
- You will need to pay back 100% of your debt plus an administration fee and likely some interest.
- You will not likely be able to obtain new credit while enrolled in your debt management plan as a condition for reducing or waiving interest.
- You will need to be sure you make all of your monthly payments. If you are late you will potentially invalidate your agreement with your creditors and may lose out on any negotiated benefits including lower interest.
- Missed payments under a debt management plan will affect your credit score and will likely remain on your credit report for up to 7 years.
- You must do a lot of research to find a reputable and reliable credit counselling agency to administer your debt management plan. You should beware of debt settlement companies who offer too good to be true settlement programs.
If based on your personal situation and a review of these debt management plan pros and cons you feel that you are not able to pay back all of your debts, are dealing with the potential for a wage garnishment or may not be able to make all of your payments as suggested by your credit counsellor you may want to consider making a consumer proposal. Consumer proposals are a formal action under the Bankruptcy and Insolvency Act, administered by a Consumer Proposal Administrator. There are several differences between a consumer proposal and a debt management plan that may provide a better debt relief option for you.