Are you struggling with overwhelming debt? Owe different debts to a number of different creditors? At Spergel, with over thirty years’ experience of helping Canadians gain debt relief, we understand how stressful this financial situation can be. Trying to juggle multiple debts and keep track of your payments each month while you have creditors breathing down your neck is never the easiest of tasks. On top of this, life events, unexpected scenarios, endless bills, and expenses can all make life challenging. If these circumstances sound all too familiar to you, a form of debt relief or a Debt Management Program may help to make your life easier. Our experienced Licensed Insolvency Trustees at Spergel are here to review your financial situation with compassion and understanding, and help you on your pathway to a life free from debt. We can help to make your debt payments more affordable. In this article, we share everything you need to know about a Debt Management Program and other debt relief options available to you.
What is a Debt Management Program (DMP)?
A Debt Management Program, or a DMP, is a program run by credit counsellors that consolidates unsecured debts into a single monthly payment. It can have the advantage of significantly reducing or eliminating interest rates on the debt. You do, however, need to repay the full amount of debt that you have over a period of time, usually up to five years. Your repayments on a Debt Management Program are made to the credit counsellor, who then distributes the payments to your creditors until the debt has been repaid in full.
How does a Debt Management Program work?
A Debt Management Program begins by meeting a credit counsellor, who will review your financial situation and establish whether you are eligible; whether your creditors will accept a DMP; and what you can afford in terms of monthly repayments. If you are eligible and agree to proceed, here is what happens typically:
- Your credit counsellor will reach out to your creditors and negotiate a settlement that both meets yours and your creditors’ needs
- Once a plan is agreed, you will make payments to your credit counsellor
- Your credit counsellor will distribute payments to your creditors each month until the balance is paid off in full
- Once your balance is paid off, you will no longer owe money to your creditors involved in the Debt Management Program
While in a Debt Management Program, you will not be able to take out any new credit cards. It might be possible to get secured credit, like a mortgage or car loan, but this ultimately depends on your credit score and eligibility. Your credit counselling agency is there to help you to budget so that you can feasibly commit to your monthly payment, without becoming reliant on credit cards. They will also help to provide education on money management and budgeting, so that your financial management stays healthier longer term. This way, you are well equipped for a future free from debt.
Who is a Debt Management Program best suited to?
Debt Management Programs are most suitable for Canadians who are keen on repaying the full amount of debt that they owe. Perhaps they are going through a period of financial difficulty, but anticipate becoming on track again when their debt is simplified and structured via a DMP. It is well suited to individuals who are trying their best to stay on top of their monthly payments, but for whom this may be becoming a struggle. DMPs are best utilized when the credit card debts owed are still with the original creditor, and have not yet been passed on to a third party debt collector or collection agency. Debt Management Programs will only work if you are able to sustain your monthly payments. While DMPs can reduce and even sometimes eliminate interest rates on your debt, they cannot reduce the principal of the debt you owe – you will still need to pay back something each month in order to gain debt relief. DMPs are typically best for Canadians who owe at least $10,000. In order to be eligible for a Debt Management Program, you need to have a steady source of income in order to make your monthly payments.
What are the advantages of a Debt Management Program?
A Debt Management Program has a number of benefits:
- It simplifies your debt payments into one
- It can reduce your interest – you may be able to negotiate a reduction in interest rate with your creditors
- Monthly payments are typically reduced by up to 30-50%
- A pathway to debt freedom – your debt will be structured to help you stay on track for repayment
- Financial support – when you are struggling, a credit counsellor can support you with advice and tips throughout your Debt Management Program
- You will repay all your debt, which can create a sense of accomplishment
- It can be used for high amounts of debt, even beyond $100,000
- It will have less of an impact on your credit score than other debt relief options including bankruptcy
What are the disadvantages of a Debt Management Program?
As with all forms of debt relief, there are some disadvantages of a Debt Management Program:
- Your credit cards will be frozen when you enrol, and you will not be able to open any new ones
- A DMP can take longer and cost more overall than other debt relief solutions like a consumer proposal that substantially reduces your debt
- A DMP will have a negative impact on your credit report
- You may have difficulty gaining credit after completing a DMP, although at Spergel we can help you to rebuild your credit score
Which debts can be included in a Debt Management Program?
Debt Management Programs are most often used to provide relief from the high interest rates associated with credit card debt. There are some other unsecured debts that you may be able to include for consolidations, provided your creditor agrees to accept payments via your DMP:
- Instore credit lines
- Unsecured personal loans
- Lines of credit
- Debt consolidation loans
- Debts in collections
It is worth noting that secured debts cannot be included as they are associated with collateral. This includes mortgage, home equity loans, home equity lines of credit (HELOCs), car loans, and also student loans if you stopped your studies less than seven years ago.
How much does a Debt Management Program cost?
The idea of a Debt Management Program is certainly not to cost you more on top of the debt you have already accumulated, but there are some associated fees. These include:
- Interest rates associated with the credit card debts you enrol. In some cases, your creditors will reduce or even eliminate the interest rates on your debt completely. Generally speaking, the interest rate will be 0-5% on your debt, all of which will go towards your creditors.
- Credit counselling agency fees for the setup and administration of your DMP. If you choose to enrol on a DMP with a nonprofit credit counselling agency, they will try to keep their fees as low as possible. That said, there is still an associated fee due to the cost of administrating your program. This is often a one-off setup fee, and a monthly administrative fee. All fees are included as part of the DMP so that payments are kept as manageable as possible. Not all credit counselling agencies are nonprofit, so you should be sure to check before you enrol.
Can you leave a Debt Management Program?
Enrolling in a Debt Management Program is at your discretion. If your circumstances change, you may wish to drop out of it. If, for instance, you are struggling to keep up with the monthly payments and decide you want to file a consumer proposal or bankruptcy instead, you can do so. Equally, your financial situation may improve – in this case, you might be able to afford to pay off your debts without the need for a Debt Management Program. If you drop out of a Debt Management Program, your creditors will usually restore the original higher interest rates associated with your debt, along with any associated fees that may have existed on your account.
How does a DMP affect my credit score?
Given that a DMP shows you need support in structuring and repaying your debt, it will have a negative impact on your credit score. Debts enrolled in a Debt Management Program will have a R7 rating on your credit report. This notation will remain on your credit report for two years after you leave the program, and will reflect that you were not able to repay a debt via a standard repayment schedule.
How long does a DMP last?
A Debt Management Program can only last up to a maximum of 60 payments – which means you should be debt free within five years. That said, many DMPs finish sooner – three years is the typical length. Of course, depending on your budget you may be able to increase your monthly payments and finish your program sooner. Your credit counsellor will advise you as to how long your program should take.
What is the difference between a Debt Management Program and a consumer proposal?
You may have heard of a consumer proposal, and might be trying to decipher the difference between a Debt Management Program vs consumer proposal. A consumer proposal is a legal form of debt settlement in Canada in line with the Bankruptcy and Insolvency Act which can reduce your debt by up to 80%. It is the process of suggesting an affordable amount to repay your creditors each month. Your Licensed Insolvency Trustee will then negotiate with your creditors on your behalf. If accepted, you are only obligated to make your monthly payment for a period of up to five years. At Spergel, we have a 99% acceptance rate on any consumer proposals we file, which means you have a 99% chance of having your debt significantly reduced. A consumer proposal is a good option when a Debt Management Program does not fit your budget and you need your debt to be reduced substantially. While both forms of debt relief reduce interest and simplify payments, the primary difference is that a consumer proposal is the best option when a Debt Management Program is not the appropriate choice. This is because:
- A consumer proposal is a legal process – once agreed by your creditors, it is then approved by the court
- A consumer proposal can reduce the principal of your debt. While a Debt Management Program requires that outstanding debt is repaid in full, a consumer proposal can be negotiated and often leads to a reduction in debt by up to 80%
- A consumer proposal offers protection from your creditors via a stay of proceedings. Creditors and collection agencies may no longer contact you, and any legal action including wage garnishments and bank account freezes are stopped
If you are facing overwhelming debts and are struggling to make your monthly payments, a Debt Management Program may work if you think you can eventually pay off your debts in full. It can help to structure your debt, simplify your payments, and reduce your interest. If, on the other hand, you feel your debt needs a major reduction, a consumer proposal may be more appropriate in providing the fresh financial future you need. Your best option if you are unsure is to speak to an experienced Licensed Insolvency Trustee. At Spergel, we will review your financial circumstances and advise you as to your best options for debt relief.
If you would like to learn more about taking on a Debt Management Program, book a free consultation with an expert Licensed Insolvency Trustee at Spergel. We will review your financial circumstances and help you to understand your available options, from a Debt Management Program through to a legal form of debt relief like a consumer proposal or bankruptcy. Reach out today – you owe it to yourself.