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Debt Management Plans

A debt management plan, also referred to as credit counselling, is a voluntary repayment plan to deal with your debts. The most common alternatives to a debt management program are a debt consolidation loan, or a consumer proposal.

The idea behind a debt management program is simple – your debts are pooled together (they are not paid off like with a loan) by a not for profit agency so that you only have to make one monthly payment. In most cases, there will be no new interest charged to the debts included in a debt management plan. Instead your payments go directly towards reducing the debt.

Debt management plans are an excellent solution for people that can afford to repay their debt in full, but need relief from the interest they are being charged. They are not really an alternative to bankruptcy, but rather it is an option to consider while you still have the ability to make payments.

If you compare a debt management program to a consolidation loan what you will find is that the consolidation loan costs you more (since you will still be paying some sort of interest on the debt), but the consolidation loan is also better for your credit report. If you file a debt management plan your debts will be reported as an R7 – this designation simply means you have entered into a plan to repay your debts at less than the full amount of your original contracts (i.e. less or no interest). With a consolidation loan your credit might be rated an R1 – the highest possible rating, assuming you make all of the loan payments on time as required.

Interestingly, a consumer proposal receives the same credit rating as a debt management program, an R7. A consumer proposal is a legal procedure (administered by licensed trustees in bankruptcy) where you repay a portion of your debts. Like the debt management program there are no interest charges, but unlike the debt management program, in a consumer proposal you usually only repay 30 to 50% of the debt. Also unlike the debt management plan, consumer proposals are a direct alternative to bankruptcy.

So which should solution should you be considering?

Well, if you can afford to repay your debt in full and you qualify for a consolidation loan then this is probably the correct solution for you to use.

If you can afford to repay the debt, but the interest charges are killing you, or if you have applied for a consolidation loan and been rejected then a debt management program might be the place to start.

If repaying the debt in full will be difficult, or you know that you cannot afford to repay the debt in full, then a consumer proposal is likely the best route for you to consider.

The trick with all of these solutions is to consider each option carefully and then make a decision based on what you can realistically afford to repay. If after you “run the numbers” none of these options make any sense then you may have to consider personal bankruptcy, which is discussed in detail on this site.