• By: DebtEase Solutions Team
• September 25, 2024
• Call to compare 1-888-529-5649

Debt Management Plans in Canada

A Beginner’s Guide to Debt Management Plans

Managing multiple high-interest credit card balances can be overwhelming, often leading to financial strain that could result in insolvency. If minimum payments aren’t helping you make progress and you find yourself stuck in a cycle of debt, seeking professional assistance may be necessary. One viable option is a debt management plan (DMP), a structured approach designed to help you pay off your debt more efficiently.

What is a Debt Management Plan?

A debt management plan, often referred to as a DMP, is a professionally guided repayment strategy tailored for credit card debt. To initiate a DMP, you’ll work with a credit counseling agency that evaluates your financial situation to determine if this program suits your needs.

DMPs consolidate your credit card debts into a single, more manageable repayment schedule. Unlike debt consolidation loans, you still owe your original creditors; the counseling agency assists in creating a repayment schedule that fits your financial capabilities while negotiating to lower or eliminate interest charges.

This reduction in interest rates is a key benefit of DMPs, allowing you to pay off your debt more quickly and regain control of your finances.

How Does a Debt Management Plan Work?

Step 1: Assess Your Eligibility through Free Credit Counseling
The first step to enrolling in a DMP is to determine your eligibility. This involves contacting a nonprofit credit counseling agency for a free evaluation of your debt and budget.

1. A credit counselor will review your debts, credit status, and budget to assess your situation.
2. They will explain various options available to help you overcome your debt, including:
   • Consolidation loans
   • Debt management plans
   • Settlement programs
   • Consumer proposals and bankruptcy

If a debt management plan is deemed the best course of action, you can enroll directly through the counseling agency. During your consultation, the credit counselor will provide you with an estimate of your monthly payment, allowing you to decide immediately or take some time to think it over.

What Makes You a Good Candidate for a DMP?
DMPs are ideal for individuals committed to repaying their debts. They are particularly beneficial for those who are managing to keep up with payments but are starting to feel financially strained. DMPs work best when your credit card debts are still held by the original creditors and have not been sold to a collection agency.

To successfully participate in a DMP, you must have the means to make regular monthly payments. While the program typically reduces your overall monthly payments, you must still commit to paying something each month to escape debt.

DMPs are especially suitable for individuals with debts exceeding $10,000. Canadians have successfully utilized DMPs to consolidate debts upwards of $75,000 or even $100,000.

What Can Disqualify You from a DMP?
To enroll in a DMP, having a stable income is essential; otherwise, you may struggle to make the monthly payments. If you and your counselor cannot devise a budget that allows you to afford the payments, you may not qualify. Conversely, if your budget indicates excessive income, you may also be ineligible.

DMPs primarily address unsecured debts. If your debts mainly consist of secured loans, such as mortgages or auto loans, a DMP is not the right choice for you. Additionally, debts from creditors who have initiated legal action cannot be included.

Step 2: Enrolling in the Program
When you decide to enroll, your credit counselor will request detailed information about your debts, including:

• Names of creditors
• Account numbers
• Current balances
• Status of accounts (current, behind, or charged-off)

They will confirm a suitable monthly payment for your budget and then begin negotiations with your creditors. The goals during this negotiation process include:

1. Securing lower monthly payments through the DMP.
2. Reducing or eliminating the APR on your balances.
3. Stopping any additional penalties or fees.

All creditors must agree to allow the agency to include your debts in the DMP before it officially commences. You will receive confirmation letters from each creditor once they accept the plan terms.

During this enrollment period, it is essential to continue making minimum payments on your accounts. The counseling agency will inform you when all creditors have accepted the terms and when your program payments will officially begin.

What Debts Can Be Included?
Debt management plans primarily provide relief from high-interest credit card debts, including general-purpose credit cards, charge cards, gas cards, and store credit cards. Most major creditors and retailers typically accept these debts into the program due to established relationships with credit counseling agencies.

You may also include other unsecured debts, provided the creditor consents to receive payments through your DMP. This can encompass:

• In-store credit lines
• Unsecured personal loans
• Personal lines of credit (LOC)
• Debt consolidation loans
• Debts in collections

However, debts secured by collateral, such as mortgages, home equity loans, home equity lines of credit (HELOC), or auto loans, cannot be included. Student loans are also excluded.

Step 3: Completing Your Plan to Become Debt-Free
Once your DMP begins, you’ll make a single monthly payment to the credit counseling agency, which will then distribute the payments to your creditors as agreed. The fees are fixed, making it easier to manage within your budget. You can also coordinate with your counseling team to set a payment due date that aligns with your income schedule.

While you are enrolled in the program, any credit cards and lines of credit included will be frozen, preventing new charges. Your credit report will reflect that you are making payments through a DMP, and you may not open new credit cards during this period. However, you may qualify for secured credit options, such as mortgages or auto loans, depending on your credit score.

As you progress through the program, the credit counseling agency will assist you in creating a budget to help you live without relying on credit cards. They will also provide financial literacy education resources to instill better financial habits for the future, preparing you to avoid similar debt problems once you graduate from the program.

What Happens If You Leave the Program?
Enrolling in a DMP is entirely voluntary; you can withdraw at any time if your circumstances change. For instance, if you can no longer keep up with payments and decide to pursue bankruptcy or debt settlement, you are allowed to do so. Alternatively, if your financial situation improves—such as securing a new job or a raise—you may opt to exit the program and manage your debts independently.

If you choose to leave the program, your creditors will likely reinstate your original interest rates and any previous fees on your accounts. However, your credit report will reflect any payments made during the plan.

Debt Management Plan Costs

There are two primary costs associated with debt management plans:

1. Reduced interest rates on the enrolled credit cards.
2. Fees charged by the credit counseling agency for establishing and managing your DMP.

Interest Rates
In many cases, creditors may agree to eliminate the APR on your debts entirely, while others may only reduce it. Typically, you can expect interest rates to be lowered to between zero and five percent. All interest charged during your enrollment will go to the respective creditors.

Fees
Nonprofit credit counseling agencies strive to keep fees minimal, but there are some costs involved in setting up and administering your plan. Expect to pay a one-time setup fee along with ongoing monthly administrative fees. These costs are included in your monthly payment, helping you to afford the program.

Ensure that you are working with a nonprofit agency to keep expenses as low as possible, as for-profit agencies often charge higher fees.

Will My Credit Score Be Affected?

Participating in a debt management plan can negatively impact your credit score. Any debt included in the DMP will receive an R7 rating on your credit report. This notation will remain visible for two years after you exit the program, indicating that you did not repay your debt according to a standard repayment schedule.

The extent of the impact on your credit score depends on your credit history and the number of negative items present when you enroll. The effect will be more pronounced for those with higher credit scores at enrollment compared to consumers with existing penalties.

Specialized Debt Management Plans

For Couples
If you and a partner share debts you wish to enroll in the plan, both of you must enter the DMP together. The credit counselor will assist in creating a plan that addresses all joint debts, as well as individual debts if desired, resulting in one monthly payment and a joint budget.

For Military Families
Some credit counseling agencies may offer discounts to members of the Canadian Armed Forces and Veterans, such as waiving setup and monthly fees. If you are or have served in the CAF, inquire about potential discounts before enrolling.

Weighing the Pros and Cons of Debt Management Plans

As with any debt relief option, it’s important to consider the advantages and disadvantages of DMPs. Assess these factors against other solutions to ensure you’re making the best financial choice for your situation.

 

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