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Debt Management Plan
A debt management plan enables Canadians who struggle with debt to repay what they owe over a period of five years. This is a service offered and managed by credit counselling agencies. Using a debt management plan can help you repay your debt. However, this service is not without its downsides. Read on to find out more about how a debt management plan works.
What Is a Debt Management Plan
A debt management plan is a process that enables credit counsellors to consolidate your unsecured debts into a single monthly payment. This process can be extremely helpful if you owe money to multiple creditors because it makes repayment easier to manage.
However, a debt management plan doesn’t reduce the sum you owe. You still have to repay your creditors in full, albeit over a period of up to five years. To do so, you have to make a monthly payment to your credit counsellor who distributes the money to your creditors.
How Does Debt Management Work?
To find out if you qualify for a debt management plan, you first have to find a non-profit credit counsellor. On your first meeting, the counsellor reviews your financial situation. The counsellor evaluates your income and your debts to find out if you qualify for a debt management plan, if your creditors are willing to accept a debt management plan, and how much of your debt you can repay each month.
If you qualify for a debt management plan, your credit counsellor will contact your creditors to convince them that such a plan is in their best interest. If your creditors agree that you can pay them through a debt management plan, you will start making payments toward your credit counsellor who will then distribute the money to the creditors.
Am I Eligible for a Debt Management Plan?
Debt management plans are solutions for people who have the means to pay off their debts but cannot qualify for a debt consolidation loan. Even though a debt management plan does not decrease your debt, it can make it more manageable because you would only have to make a single payment toward repaying your debt every month.
Is a Debt Management Plan a Good Idea?
Debt management plans can be a good idea if you can afford to repay all your creditors. However, this process is not a solution for everyone because
- It cannot deal with all your debts
- It does not reduce your debts, it only makes them more manageable
- Your creditors have to agree with the plan for you to qualify
- Is not a legally binding process, so your creditors are not obliged to respect it
- It will show up on your credit report
- You have to repay everything you owe
A debt management plan is not a good idea if you’re looking for debt relief. However, if you want to reduce and eliminate your debt, you should consider a consumer proposal.
Consumer Proposal Vs Debt Management Plan
The first major difference between a consumer proposal and a debt management plan is that a consumer proposal can help reduce your total debt by up to 75%. In a debt management plan, you’re required to repay your debt in full.
The second difference is that the consumer proposal is a legally binding agreement between you and your creditors, so they have to respect it.
Filing a consumer proposal puts a stop to all debt collection efforts, including wage garnishments and account freezes. The proposal also stops all interest or penalty charges.
Just like a debt management plan, a consumer proposal consolidates your debt into a single, manageable monthly payment that can span over up to five years.