Using a Debt Management Plan
Paying off high-interest rate credit card debt can be challenging, especially when you have high balances on multiple credit cards. If you’re having trouble getting out of debt on your own, a debt management plan may be the solution you need. In the right circumstances, it can make it much easier and faster to become debt-free. Let’s look at how the plan works and how you can decide if it’s the right choice for you.
What is a debt management plan?
A debt management plan, also known as a debt management program, is a debt relief option designed to help Canadians pay off debt. It is administered by a credit counselling service. It consolidates your debt into an affordable payment plan and minimizes or eliminates interest. As a result, you can get out of debt in 60 payments or less and save money as you become debt-free.
A debt management plan is not to be confused with a debt settlement program. The latter only repays a portion of what you owe. A debt management plan repays everything you owe more efficiently. This helps minimize credit damage and provides some other benefits that we’ll detail below.
How a debt management plan works
- You contact a credit counselling organization to receive a free debt and budget evaluation from a trained credit counsellor.
- After reviewing your debts, credit, and budget the counsellor will help you decide if a debt management plan is the best fit for your situation.
- If so, the counsellor will work with you to find a monthly payment you can afford.
- Then the counselling team will contact your creditors and work with them to reduce or eliminate the interest rates applied to your balances.
- Once all your creditors agree, your plan will officially start.
- You make one payment to the credit counselling service each month and they distribute it to your creditors every month as agreed.
- As each credit card gets paid off, the account is closed.
- Once all your debts are paid in full, you complete the program and can enjoy your debt-free life.
Learn about the process.
Jeff Schwartz, Executive Director of Consolidated Credit, walks through how debt management plans work and what you can do to make sure you’re a good candidate.
What types of debt can I include?
A debt management plan consolidates most types of unsecured debt, including:
- Credit cards
- Store credit cards and in-store credit lines
- Unsecured personal loans
- Personal lines of credit (LOCs)
- Debt collection accounts
- Short-term installment loans, such as payday loans
- Old utility or cell phone bills, not currently in use
You cannot include secured debts, such as a mortgage or car loan. You also may not include student loans and debts owed to Canada Revenue Agency (CRA).
Debt management plan fees
A debt management plan does have fees that apply, but the cost is low compared to other solutions. There are two fees that you can expect when you enroll:
- A one-time setup fee
- A monthly administration fee
As a charitable organization, Consolidated Credit does not charge clients to generate profits. These fees simply cover the administrative costs of overseeing your debt management plan.
Fees are based on the total debt you enroll in the plan and your budget. They are rolled into the monthly payments for your program, meaning you do not need to worry about an extra bill. You will not pay any monthly fees until your creditors agree to the terms of your debt management plan and you start to make payments.
The fees for a debt management plan are low compared to other solutions. With a debt settlement program, you pay a percentage of the original amount owed on each debt you settle. Consumer proposals have a filing fee of $1,500 plus 20 percent of all future payments under the proposal. Filing a first bankruptcy has a $1,800 filing fee broken up into nine installment payments of $200.
When you receive free credit counselling before you enroll in the program, the credit counsellor can explain the fees that you can expect. You will know what you can expect to pay before you sign up.
Debt management plan pros and cons
The primary benefit of a debt management plan centres on the savings it provides. Minimizing interest makes it much easier to pay off your debt and much faster. Balances that would take years or even decades to pay off can be paid off in 60 payments or less. A debt management plan can reduce your total credit card payments by up to 30 to 50 percent, and it may lower your monthly payments as well.
There are some downsides to a debt management plan that you need to note. It will be noted on your credit report that you are paying off your debt on an adjusted payment schedule. This notation remains for two years from the date you complete the program. You also cannot use the credit cards you enroll in the program. The cards will be closed once they are paid off.
|Minimize or eliminate interest charges (APR reduced to 0-10 percent, on average)||Cannot use credit cards enrolled in the program and cannot apply for new credit while enrolled|
|Become debt-free in 36-60 payments, on average||Credit card accounts will be closed once they are paid off|
|Make one affordable monthly payment for all your debt||Noted in your credit report for two years from the date you complete the program|
Debt management plans also offer advantages versus other debt relief solutions. For instance, it does not create a permanent public record, as you see with consumer proposals and bankruptcy. You also protect your assets from being sold to repay your debts, which will happen if you file for bankruptcy.
A debt management plan and your credit
It’s important to recognize that a debt management plan will have some negative impact on your credit. The program is noted on your credit report for two years from the date you complete the program. Any accounts you include in the program will have an R7 status notation, which shows that it is a revolving account being paid back on an adjusted schedule.
Closing credit card accounts may also impact your credit score, especially if you close old accounts. Creditors consider “credit age” when calculating your credit score, which is the average age of all your accounts combined. If you close old accounts, it can decrease your credit age, which can in turn decrease your score.
Keep in mind, any decrease in your score will be temporary. You can also take steps to rebuild your credit once you get out of debt. What’s more, the credit report notations that result from a debt management plan are less severe than other debt relief solutions.
For example, a consumer proposal will also generate an R7 status for any account included in the proposal. However, the notation will remain for three years from the date your debt is discharged instead of two.
The credit damage caused by solutions such as debt settlement and bankruptcy is even more severe. These types of notations remain for six years and have a significant negative impact on your credit score. So, while a debt management plan will negatively impact your credit, it helps you avoid greater damage.
Frequently asked questions
This depends on the accounts that you want to include in your debt management plan. If the accounts are held jointly with your spouse, then you would need to enroll together. If you hold the accounts you wish to include in the plan individually, then you can enroll on your own.
No, although it is highly recommended. In rare instances, you may be able to leave a credit card out for emergencies, medical purchases on line, or if it is required for you to earn an income. However, your credit counsellor will help you balance your budget with built-in savings, which should help you cover unexpected expenses without a need for a credit card.
Ideally, you want to include all your cards so you can enjoy a complete break from credit reliance. This will help ensure you are completely debt-free once you complete the program.
No. These two debt relief solutions are often confused but are vastly different. A debt management plan pays off the principal (the actual debt you owe) in full. Debt settlement only pays a fraction of the principal off. That’s why debt settlement results in greater credit damage because you don’t repay everything you owe.
With a debt settlement plan, your creditors do not agree to the new payment arrangement from the beginning. They also will not be paid every month. This can result in charge-offs, collections, and potential lawsuits.
With a debt management plan, your creditors agree upfront to accept payments through a credit counselling organization. They receive those payments every month as agreed. You and Consolidated Credit maintain contact with your credit card companies while you are enrolled.
No. A debt management plan should not be confused with a debt consolidation loan. While a debt management plan consolidates your debts into a single monthly payment, you still owe your original creditors. When you enroll, you do not take out a loan through Consolidated Credit and use the funds to pay off your creditors.
Instead, Consolidated Credit’s team serves as your advocate and works with your creditors on your behalf. Each month, when you make payments to Consolidated Credit, we distribute those payments to your creditors as agreed. You can see the balances on your credit card accounts decrease gradually as you work through the program.
Enrollment in a debt management plan is voluntary. Unlike a consumer proposal, a debt management plan does not create a legally binding agreement between you and your creditors.
This means you can drop out of the plan at any time without facing any penalties. All the payments made will still be credited to your credit card accounts, so you will still benefit from the progress you made up to that point.
It’s important to note that your creditors will likely restore the original interest rate and any penalties or fees applied to your account before you enrolled.
Deciding if a debt management plan is the right solution for you
Like all debt solutions, a debt management plan is not for everyone. If you have the means to pay off your debt on your own, it’s recommended that you do so. That will help you avoid any negative notations in your credit.
A debt management plan also can’t help you if you don’t have the means to make monthly payments. If you are unemployed or cannot afford to make any payments on your debt, then this solution is unlikely to work.
A debt management plan is meant to help Canadians who are having trouble getting out of debt on their own, but who are dedicated to paying off what they owe. Your credit counsellor will work with you to find a monthly payment you can afford.
If you’re still unsure, call to speak with a trained credit counsellor. The counsellor can review your budget and help you understand all the options you have for relief. Then they can help you identify the best solution for your needs. The counsellor will only recommend a debt management plan if it’s the right fit for your unique financial situation.
Talk to a trained credit counsellor now for a free debt and budget assessment so you can see if a debt management program is the right debt relief solution for you!