Debt Management Programs vs Other Debt Solutions
Debt Management Programs are just one of many debt solutions available. Each solution has its advantages and disadvantages. The best one is the one that fits your situation. There are many factors to consider, including:
- Income
- Debt amount
- If payments are in arrears
- Whether the debt has gone to collections
- The type of debt
Taking all this information into account, it’s then a matter of understanding how each of the debt solutions works and matching up your financial picture with the solution that has the best chance at getting you back on track with the least amount of negative impact.
Below are explanations of the most common debt solutions and how they each compare to a Debt Management Program.
Debt Consolidation
Debt consolidation and Debt Management Plans (DMPs) both streamline multiple debts into one monthly payment, but differ in a couple of important ways.
Firstly, debt consolidation involves taking out a new loan or balance transfer credit card to pay off existing balances. This strategy typically requires a decently strong credit score (often 650 or higher) to qualify for lower interest rates. On the other hand, DMPs don’t require accessing more funds, so there is no minimum credit score requirement.
Secondly, while consolidation can include both secured and unsecured debt, DMPs generally only include unsecured debts like credit cards.
Lastly, DMPs usually require participants to close the credit card accounts included in the plan. Consolidation often allows you to keep your cards; however, this carries a risk of accumulating more debt if spending habits do not change. A risk that is enhanced by the fact that consolidation does not involve any financial coaching or support, whereas DMPs do.
Consumer Proposal
Both DMPs and Consumer Proposals help get debt under control, just in very different ways.
A DMP is when you work with a Credit Counsellor to negotiate a repayment plan with your creditors. You usually pay the full amount you owe. However, the interest rate is greatly lowered, often to zero.
A consumer proposal, on the other hand, is a legal process administered by a Licensed Insolvency Trustee that settles debts by making an offer to pay back only part of what you owe over a longer period of time.
While DMPs focus solely on unsecured debts, Consumer Proposals can resolve both secure and unsecured debts such as, tax debts and student loans (if out of school for seven years).
The credit impacts are similar in that both options result in an R7 credit rating. A DMP notation usually remains for two years after completion, whereas a Consumer Proposal stays for three years after completion or six years from filing.
Bankruptcy
While both DMPs and Bankruptcy offer debt relief, how they each go about it is vastly different. A Debt Management Plan (DMP) is a voluntary agreement where you repay 100% of your debt principal. The savings come from reducing, often even eliminating, interest charges. Bankruptcy, on the other hand, is a legal process that wipes out most unsecured debts, including taxes.
While it’s highly uncommon for creditors to withdraw their participation from a DMP, they are able to do so should they so choose. This generally only happens when the debtor isn’t meeting their DMP payment obligations. Bankruptcy provides an automatic “stay of proceedings,” legally halting collections and wage garnishments.
The length of the programs also varies. Bankruptcy discharge typically happens within 9 to 21 months. Debt Management Programs are usually completed within 3 to 5 years.
Bankruptcy requires surrendering non-exempt assets and making payments based on income rather than the total debt amount. DMPs don’t require giving up any assets, but, similar to bankruptcy, you are typically required to close any accounts included in the plan.
How each of these options impacts credit also differs. DMP results in an R7 rating and is usually erased around two years after completion of the program. Bankruptcy results in an R9 rating, the lowest possible rating, and it remains on reports for 6 to 7 years after discharge.
Debt settlement
DMPs and debt settlement often get confused, but they are vastly different, particularly in one significant way. By the time someone completes their Debt Management Plan, they have paid off the principal (the actual debt owed) in full. The savings from doing a DMP come from eliminating the interest costs. A debt settlement involves negotiating with creditors to pay off a portion of what’s owed.
Each of these debt solutions has its pros and cons. For example, doing a debt settlement usually requires paying off the full negotiated amount right away. Many people simply don’t have the cash available to do that. A DMP, on the other hand, allows you to pay off the debt by way of regular payments.
