The second in our Debt Management Series, today we talk about formal Debt Management Plans. The term debt management, as it refers to help from debt management companies, has been used rather broadly in advertising lately. Largely an unregulated industry, debt management plan can mean different things to different debt management service companies. Today we will address what a formal Debt Management Plan is, and what it is not.
Debt Management Plan (DMP)
A Debt Management Plan (sometimes called a Debt Management Program) is a voluntary agreement between you, the debtor, and your creditors to pay off your outstanding unsecured debt over an agreed upon period of time (usually three to five years).
A Debt Management Plan is arranged with the help of a debt advisor, preferably an accredited, not-for-profit, credit counsellor. Creditors are more willing to discuss payment arrangements with accredited credit counselling agencies. Reputable credit counseling agencies employ counsellors who are certified and trained in consumer credit, debt management, and budgeting. They provide on-going education and counselling that will help you be more financially fit in the future.
Key Features of a Debt Management Plan
In a Debt Management Plan your credit counsellor negotiates a reduced payment plan to pay off your debts in full, based on what you can afford. A DMP can be a good solution if you can afford to pay all of your debts but need some relief from high interest costs. In a debt management plan:
- Only unsecured debt (like credit card debt) is included.
- You repay the full outstanding debt, although creditors may waive or forgive interest and penalties. Sometimes they will agree to waive interest based on your payment history during the DMP.
- You make one monthly payment which is pro-rated among your creditors based on the agreement. You make this payment to the credit counselling agency who will then distribute the funds. This is not the creation of a ‘settlement fund’ which is quite different and explained further below.
- It usually takes three to five years to pay off your debts through a debt management plan.
- You choose which creditors to include, and which creditors to exclude.
- The agreement is voluntary, and is not binding on all of the creditors. If one creditor chooses not to participate, these debts will not be included in the agreement and you will continue to be responsible for those debts and any interest and / or penalties.
- It will not stop wage garnishments or other legal action.
What a Debt Management Plan is Not
Many debt management companies advertise that through a debt management plan (or similar program) you can reduce your debts by up to 70%. This is not what a Debt Management Plan is. What they are referring to is really debt settlement. This type of ‘debt settlement program’ can be very risky. We recommend you read about the difference between a consumer proposal and debt settlement before choosing this form of debt relief.
Must-Dos If You Are Considering A Debt Management Plan
To ensure that your Debt Management Plan is successful, we recommend the following:
- Prior to choosing a debt management company, do your research about your debt relief options. Ensure that your debt advisor presents all of your options and that their initial consultation is free and without obligation. Avoid the hard sell. You should be allowed to consider your alternatives before signing.
- Consider contacting some of your larger creditors to ask them if they will accept a plan from the debt management company you are considering. Before you make any payments, ask your creditors if they have agreed to the terms of the arranged plan.
- Make regular payments, on time.
- Contact your credit counsellor immediately if you are unable to make a scheduled payment.
- Take advantage of the credit education and counselling programs offered by an accredited credit counselling agency to ensure that after your debt management plan is complete, you will have strong financial management and budgeting skills to ensure that you do repeat bad debt mistakes.
A Debt Management Plan can be the solution to helping you gain control of your finances and pay off unsecured debt. The key is to do your homework and choose the right advisor.