Below are all the answers to the most common debt management plan faqs so you can decide if it’s the right debt solution for you.
Canadians are no strangers to credit card debt. MoneySense reports that the average credit card debt is now $4,265. At this level, many are struggling to make ends meet. A debt management plan (DMP) is an agreement between the debtor and creditors to repay debts on a modified schedule. DMPs can help people with overwhelming credit card debt regain control of their finances.
Debt comes in two forms: secured and unsecured. Knowing this information will help you understand if creating a DMP is right for you.
Secured debt is a loan backed by collateral, like a house or a car. If you don’t pay back the loan, the lender can take and sell your collateral to get their money back. Unsecured debt, which is what DMPs are used for, is a loan or credit without collateral. If you don’t repay it, the lender can’t claim a particular asset, like your house or car.
The cost of a debt management plan changes based on the credit counselling agency you choose. Usually, there are two fees: a small one-time setup fee and a nominal recurring monthly maintenance fee that is included in your debt repayment payment.
The initial consultation at Consolidated Credit has been and will always be free. In fact, most of our services don’t cost anything.
A DMPs low fee makes it a accesible option that saves people thousands in interest payments.
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 to settle debts by making an offer to pay back only part of what you owe over a longer period of time.
Yes! You can get a mortgage after finishing, even during, a debt management plan. However, it can be more challenging, for those currently participating in or recently finishing a DMP, to get a mortgage. Those that partake in DMPs have often struggled with debt for some time and have low credit scores. Lenders will consider factors such as your credit history and financial stability before approving your mortgage application. So, while partaking in a DMP itslef does not have any great impact on getting a mortgage a low credit score can make getting a mortgage more difficult.
If you’re finding it difficult to pay off your debts, reaching out to a debt management company is smart. They can give you professional help and create a plan to get rid of your debt and support you along the way.
People who get a DMP usually have low credit scores because of struggling with payments. Their score might decrease slightly when they begin a DMP. However, it is good for the future. It allows debtors to catch up on payments and start over. Getting a fresh start will let you plan for financial goals such as buying a home, taking a vacation, or saving up for an emergency fund.
A Licensed Insolvency Trustee (LIT) can help you create a DMP. However, a DMP is typically handled by credit counselling agencies, like Consolidated Credit. LITs, for the most part, usually deal with more formal debt solutions like consumer proposals and bankruptcies.
Debt management plans help you tackle your debts by setting up a manageable repayment plan with highly reduced interest rates. Also, you can merge multiple debts into one. All together that means simplified finances, reduced financial burden, and saving money in the long run.
The key to rebuilding your credit after a DMP, is to continuoulsy make all your payments in full and on time. Using a secured credit card can also help improve your credit score.
Those that benefit most from doing a DMP are those struggling to keep on top of unsecured debt payments. These are debts like:
- Credit card
- Line of Credit
- Pay Day loans
If this sounds like you, contact a credit cousellor to find out more about how a DMP can help.
No. In fact, once debt has been passed on to a collections agency it’s no longer owned by the original creditor. Which means the original creditor has no authority to negotiate any repayment.
Collection agencies purchase your debt from creditors. These agencies have certain actions they can take to retrieve the money owed, such as:
- Go to court to request that your wages be garnished.
- Put a hold on your bank account or request a freeze on your account.
- Write of execution. This will allow them to seize non-exempt property. They will then sell the property to repay the debt.
Often, you can start a debt management plan the same day you meet with a credit counsellor.
A DMP can affect your credit score depending on how it is managed. While there might be a slight drop when starting a DMP, if you diligently make payments as agreed upon in the plan, in the long run, it can have a positive effect on your credit score. However, if you miss payments or cannot fulfill the terms of the arrangement, it can hurt your credit score.
Generally, any credit cards involved in a DMP will have to be closed. If that is concerning to you, your credit counsellor can help you with coming up with a plan to live within your means so you don’t need a credit card. They can also guide you in where to get other forms of credit.
You can save a lot of money with a DMP. How much you save depends on your income, total debt, interest rates, and negotiated terms with creditors. A debt management plan can typically reduce debt loads by as much as 30% to 50%.
Not all your credit card debts need to be included in the plan. However, we recommend adding any card with a balance to your plan. By doing this, you will help yourself in managing and paying off your debts. A strategic approach is important for a successful debt management plan to work.
While on a DMP, you must make regular monthly payments towards your debts. A credit counselling agency will work with you to agree upon the amount. It’s recommended that you not take on any new debt without consulting the agency first.
To give yourself some reassurance and peace of mind, before joining a DMP, it’s a good idea to read reviews about the credit counselling agency that you have chosen. Another good place to look is the Better Business Bureau. They are third party organization that rates business. Trustpilot is also a great source to reference. Verifying these resources will give you a sense of their business practices and a good indacation that it’s safe to move forward with the DMP.
If you can’t make full payments to your DMP, it is wise to talk to your credit counsellor. They will work with you to adjust your plan.
If you want to reduce your monthly payments to your creditors, speak with your credit counsellor. They will review your plan and inform you about what is possible and what is not when lowering your payments on the program.
Yes, you can make extra or larger payments to your DMP if you have the means to do so. This can help you pay off your debts faster and save on interest charges.
Pros
- Provides a structured repayment plan: A DMP offers a clear and organized strategy for paying off debts, which can help you regain control of their financial situation.
- Lower interest rates: With a debt management plan, creditors may agree to lower interest rates, resulting in decreased monthly payments and potentially significant long-term savings.
- Consolidates multiple debts: This allows individuals to put their debts into one manageable payment, simplifying the repayment process and potentially reducing stress.
- Stops collection calls: Engaging in a debt management plan can put an end to harassing collection calls from creditors, providing relief and peace of mind.
- Improves credit score over time: In the long term, successfully completing a DMP can positively impact credit scores by demonstrating responsible financial behavior.
Cons
- May require closing accounts: Some creditors may require you to close your accounts when enrolling in a DMP, limiting future access to credit.
- Lengthy repayment period: Debt management plans often involve extended repayment periods that can range up to 5 years.
- Limited credit options during the plan: While on a debt management plan, you may face some restrictions on obtaining new credit or loans until the program is completed.
- Potential impact credit score initially: Enrolling in a DMP could temporarily affect credit scores due to the necessary account closings or negotiated adjustments with creditors.
Not suitable for all types of debt: Some forms of debt, such as student loans or child support debts, may not be eligible for inclusion in a debt management plan, limiting its effectiveness for certain individuals.
