Debt management programs are one of several ways to get out of debt. As with any debt solution, there are a series of pros and cons to consider before landing on a final decision. Part of this process is understanding the financial mechanism, too. Any time you make a personal finance choice in life, it’s important to educate yourself. Also, you should compare the decision’s outcome against your current finances and goals.
If you’re considering debt management as a debt solution, you’ve come to the right place. By the end of this article, you will understand what debt management is and how it works. You will also know the pros and cons as well as alternative solutions. The decision to become debt free can seem daunting, but remember, a debt-free life will be more fulfilling!
What is a Debt Management Program?
A debt management plan or program, DMP for short, consolidates your unsecured debt. Unsecured debt refers to credit card debt and any other type that doesn’t have collateral. By using a DMP, you only need to worry about one payment a month as opposed to many. Typically, people use a DMP when they have tried managing their debt on their own with no success. It’s a good way to get your finances back on track with little consequences legally and to your credit score.
How Does a Debt Management Program Work?
The main premise of a debt management program is to consolidate your debt. In order to do so with a debt management program, you must go through a credit counseling agency. It is possible to consolidate your debt on your own, too. You can do so by taking out a loan to cover all your debt then pay off that loan. However, many struggling financially cannot get approved for such loans. If this is the case, debt management programs are quite useful.
The debt management company consolidating your debt will pay creditors on your behalf. All you’re responsible for is making the monthly payments to the agency. To ensure you’re on the right track to a debt-free life, the payment is affordable by basing the amount on your budget. A major benefit to using debt management programs is the zeroed-out interest rates. Usually other applicable fees zero out, as well. Some creditors won’t agree to zero interest or dropped fees. Although, they may reduce the cost significantly. It all depends on what your credit counselor can negotiate for you with creditors. This means your monthly payment will be lower using a DMP compared to handling your debt on your own.
Because of the lowered payments, it is necessary that you make them on time and in full every period. If you miss a payment or make a partial one, it will reflect poorly on you in the lender’s eyes. You will risk losing your favourable terms under the DMP.
In general, DMPs last anywhere from three to five years. You may be able to stretch payments longer if you need to. Finally, there are usually enrollment and monthly fees applicable to DMPs. Even with them, your monthly payment should still be lower than if you were paying the debt on your own.
The first step of the DMP process is for your credit counselor to ask a lot of in-depth questions. They need to fully understand your financial situation. Also, a credit counselor may suggest other options such as a proposal or bankruptcy. Take the time to consider your options before agreeing to anything.
If you decide to proceed with a DMP, expect to live without credit cards for the duration of the program. Often, credit card issuers require account closure. It is possible to keep a card for emergencies or business; however, it depends. Be sure to ask your credit counselor before signing up. In addition, you likely won’t be able to have any other credit obligations while on the plan. Existing creditors may withdraw their changes if they see you’ve taken out new credit.
Is Debt Management a Good Idea?
As with all personal finance decisions, it depends on your current position and goals. Debt management may be a good idea for one individual but not another. Your first step is to consider your current finances and future goals. Once you do that, you can determine if a debt management program is a good idea.
On the other hand, there are some factors that make a debt management program a good idea. For one, if you’re struggling, you need to act before your situation worsens. If you don’t, you may have to use a consumer proposal or bankruptcy which has severe consequences. Fortunately, if you realize your financial struggles early, you can use a DMP. That’s because a DMP has fewer repercussions. If you can reasonably afford the monthly payments of a DMP, it is a good method to get out of debt. Also, creditors and collection agencies will reduce or cease calls.
A DMP may not be right for you if you’re struggling to pay necessities of life such as food, rent, and utilities. Alternatively, if you cannot give up the use of credit cards, a DMP isn’t right for you. Last, but not least, sometimes people merely need some financial coaching to help them out. A DMP, proposal, or bankruptcy is sometimes too extreme for people with minor debt. Not everyone learns financial management skills early in life, but it’s never too late
How to Manage Debt Problems
A debt management program is one of many methods to managing debt. Now that you know what a DMP is, let’s look at other debt management solutions. Keep in mind that all the options below have their corresponding pros and cons. Before jumping to a decision, be sure to do your research and consider what is realistic for you.
- Create a Budget. Writing down all your income, expenses and debt can put things into perspective. You can understand where your money is coming from and going. By creating a realistic budget, you can get out of debt without seeking external help. Be sure to cut out unnecessary expenses and put the extra money toward your debt.
- Other Income Sources. Consider picking up more shifts or getting a second job to receive a higher income. The extra money can help you pay down your debt faster.
- Build an Emergency Fund. Setting money aside may seem silly when you’re trying to pay off debt. Although, it’s important to have in the event of an emergency. Otherwise, you’ll miss vital payments to cover the cost of the emergency.
- Financial Coaching. There are many professionals out there who specialize in giving financial advice. Sometimes people haven’t learned how to manage their finances properly. A financial coach can teach you how to manage your money to get out of debt. The consultation is often free. Subsequent appointments may be free, too, depending on who you are dealing with.
- Pay Down High Interest Debt First. The higher the interest rate, the more debt you’ll accrue over time. To save yourself, pay down high interest debt first. You can also try to get lower interest rates from lenders. Lenders are human. They understand financial turmoil and are usually willing to help.
- Debt Consolidation Loan. A debt consolidation loan is the same process as a DMP, but you do not go through an agency. Instead, you get the consolidation loan on your own and pay off your debts. Once you’ve paid up, you’ll need to pay off the consolidation loan.
- Debt Settlement. A debt settlement program is a method of using a third party to negotiate with lenders. The end goal is to get better terms and lower payments. The philosophy is lenders want to recover some of their debt as opposed to none.
- Consumer Proposal or Bankruptcy. Both consumer proposals and bankruptcies are legal procedures covered by the Bankruptcy Act. These options are the most severe but will result in a debt free life.
Debt Management Plan: Advantages and Disadvantages
As with any debt solution, there are corresponding advantages and disadvantages, DMP included. It is important to consider all the pros and cons of a debt solution before proceeding. Don’t forget to consider the pros and cons against your current financial state and goals as well. If you have any concerns about them, ask your credit counselor.
Advantages of Debt Management Plans
- One Payment. Instead of worrying about multiple payments, you only need to worry about one payment.
- Won’t Lose Valuable Assets. Sometimes part of becoming debt free is selling your valuable assets such as your home and car. With a DMP, you are not required to give up your assets.
- Less Severe Impacts to Credit Score. You may be wondering, is debt management bad for your credit? The answer is yes, in some ways it is – but it is a less severe option. After two years of finishing the program or after six years of starting, a DMP won’t show on your report. Compared to other debt solutions, a DMP has the less severe consequences on your credit.
- Additional Support. In addition to help eliminating your debt, you will receive other support. This includes workshops, one-on-one help and financial education.
- Short Repayment Period. Using a DMP ensures you’ll repay your principal debt in less than five years. Usually the repayment period is shorter, around three years.
- No Public Record. If you use a consumer proposal or bankruptcy, there will be a public record of the event. With a DMP, only your creditors and the agency know of your financial situation.
- Reduced or Eliminated Interest and Fees. Your credit counselor will negotiate with lenders to get reduced or lowered charges. This means your payments will be substantially lower than if you were to handle the debt on your own.
- Eliminate Credit Card Debt. Credit card debt is the most common form of unsecured debt. Many people have credit cards so you may ask, how can credit card debt create problems? The primary issue is that credit card debt has high interest. The longer you wait to pay it off, the more interest will accrue. A DMP can eliminate credit card debt easily. Plus, the interest and other fees are typically reduced or removed entirely.
Disadvantages of Debt Management Plans
- Third Party Assistance Appears on Credit Report. The fact that you are using a DMP will show on your credit report. This can reflect poorly on you because it demonstrates a lack of independence. However, becoming debt free and learning from your mistakes are both important.
- Hit to Your Credit Score. Even though a DMP has less repercussions, it will still impact your credit negatively.
- For-Profit Credit Counselling Agencies. For-profit credit counselling agencies charge big fees for DMPs. If you don’t do your research, you could end up in a worse situation. Look for non-profit credit counselling agencies instead.
- Agreement from Creditors. Creditors must agree with you and your credit counselor when using a DMP. They have the right to disagree and state that a DMP is not the correct course of action. They also have the right to refuse elimination of interest and other fees.
- Regular Monthly Payments. You will need to make monthly payments as a part of the DMP. If you can’t afford it or have struggled with monthly payments in the past, a DMP may not be right for you.
Need a Loan but You’re on Debt Management?
Creditors do not like when you take out additional debt when you’re using debt management. They may withdraw the favourable terms they gave you under your DMP. Naturally, you want to avoid having your favourable terms revoked. For this reason, if you need a loan but you’re using a DMP, you will need to use an unconventional method. Usually new credit cards aren’t possible while using DMPs. But other types of debt like car loans, mortgages, student loans and other similar debt are okay. Some of these alternative loan methods have risks, be cautious of what you agree to. Also, be sure that you aren’t risking missing a DMP payment by taking on more debt.
- Payday Loans. Payday loans are exactly what they sound like, money to fill the gap between pay cheques. They are a great way to get some fast cash, but be cautious, because the interest rates are exorbitantly high. In addition, the repayment periods are very short.
- Short Term Personal Loans. Personal loans are another form of unsecured debt. Usually they’re very easy and quick to get, especially through online lenders.
- Car Loans and Mortgages. Both car loans and mortgages have collateral making them secured debt. This means that it is lower risk to the lender. If you default on the loan, the lender will recover the amount owed by selling the asset. It is also lower risk to you because you don’t have to worry about getting into worse debt.
- Student Loans. If you want to go to school, you can get financing without having to worry about jeopardizing your DMP.
When it’s Time to Seek Debt Relief
As a rule of thumb, it’s time to seek debt relief when it is out of control and unmanageable. This becomes evident when you can no longer cover the cost of life’s necessities. Its best to handle the problem when it’s apparent, don’t wait until you can’t cover living expenses. Debt is an immense burden to carry around with you, try to handle it as soon as possible. It will feel liberating when you are completely debt free.
If you find your debt to be out of control and unmanageable, it’s time to look for a solution. Your first step is to consider your current financial state and financial goals. Once you have comprehended that, you can start looking for options, DMP is one, of course. Consider all the advantages and disadvantages of your options before you decide. Once you have, see it through to end for a debt free life!
All of these options can be confusing, if you need help managing your debt, contact a trained credit counsellor today at 1-888-294-3130. You will be provided with free advice as to which debt solution will work best for your financial situation. Or, you may choose to do a Free Debt Analysis online and a counsellor will get back to you shortly.