Debt Management Program’s. Fear, Angst and Facts. What You REALLY Need to Know
by Don Antle, President, Options Credit Services Canada
How much does a typical debt management program cost? Or; how do those guys get paid?
The short answer is that a good Debt Management Program (DMP) service costs you nothing. Zero. Zilch. Nada. The Canadian industry was set up in the 60′s by the CREDITORS themselves to allow their customers in debt distress to pay them back. The whole concept is based around Creditors providing DEBT RELIEF through interest rate and penalty waivers that REDUCE your DEBT LOAD and allow you to pay them back.
This allows the Creditors to at least get their principal and interest to date back verses what they would get from a bankrupt Client, which is probably nothing. Thus it is the Creditors not the Clients that pay the DMP fee through that debt reduction waiver.
Remember this. If anyone else in this industry actually increased a Client’s debt load this business could never work. You can’t afford the debt level you have now. In Canada you can only be on a program for a maximum of 60 months. If more debt was simply added to you on a DMP the program could never work on a mathematical level. Think about it. J
How will this affect my credit rating? Or; Will this affect my credit rating?
The short answer is that you are an R7 in Canada while on a Debt Management Program meaning you are on a special designation voluntary repayment schedule. That means you agree not to take on any additional unsecured credit while on the debt repayment program. If you have debts in collection or are seriously overdue your credit rating is an R9 anyway and you are already considered “un-bankable”. A debt consolidation or credit counselling program is the fastest way to get your credit rating built up or back to normal. Your current credit rating is a non factor from that perspective.
No reputable debt management company is there to ruin anyone’s good credit, credit rating or Beacon Score. Remember that with a debt management program your debt to income ratio increases rapidly improving your Beacon Score rapidly- the real basis for credit granting and interest rate costs. An R9 designates an uncollectable debt and makes you un-bankable the worst possible scenario for future credit. That’s what you can expect through bankruptcy IF YOU QUALIFY. Bankruptcy is no sure thing anymore as the eligibility and discharge rules were tightened considerably in Canada in 2008. Now if you have “excess” income over expenses you must pay that to a Trustee for 21 months before discharge. You can then be an R9 for 6 or 7 years AFTER that. That’s a heck of a long penalty my friend!
If you are current but just falling behind- talk to your bank about a consolidation loan or borrow money from family or friends to pay off or down your debts to a more manageable number. Call you credit card company and ask for interest rate reductions or even a debt re-aging-meaning they simply designate your past due debt as “current”.
If you have a home get referred to a good Mortgage Company or Broker who will treat you fairly. If you can qualify for a home equity loan maybe you can consolidate and pay down your debts or pay them off altogether.
If you want to settle you debts (one-time payment less than 100 cents on the dollar) by borrowing money-home equity or just from a relative etc most good Credit Counselling companies can negotiate a SETTLEMENT but it will affect you credit rating for typically at least 2 years.
In the odd case where you have good credit and are current but see a temporary problem coming in the future a good debt management agency may be able to act on your behalf to help save you credit from being negatively affected. Just bring those scenarios to them by telephone or email and they will typically evaluate their ability to intervene on your behalf and charge you on a case-by-case basis if appropriate.
The bottom line? If your credit is bad already all a DMP can do is improve it. If it’s good see above.
What’s the difference between a Debt Management Program and Bankruptcy or a Consumer Proposal?
This is very straightforward. If you qualify for a debt management program you theoretically CAN’T qualify for Bankruptcy. It’s that simple. Allow me to restate. If you have enough money to pay ALL of your debts given the interest/penalty relief offered by your debt management agency then that is what you are supposed to do. It is not a consumer “choice” to go bankrupt it is driven by your dire circumstance THAT ALLOWS NO OTHER OPTION. In a hierarchical sense debt management programs come first, Consumer Proposals second and Bankruptcy last.
THIS IS NOT A MATTER OF YOUR PREFERENCE BUT WHAT YOUR FINANCIAL SITUATION DICTATES. In other words you are required by law to pay all your debts you can afford to pay. If you qualify for a debt management program you SHOULD NOT qualify for Bankruptcy or a Consumer Proposal. You would have to be dishonest. You would have to hide income and/or assets.
Furthermore it is ILLEGAL for anyone in the industry to refer or counsel you into Bankruptcy. If you do qualify for a debt reduction program a Trustee is not an option. Period. If you don’t qualify perhaps you should see a Trustee and they can advise you from there. In Canada a debt poolers License could be suspended if they are caught referring you to Trustees or counselling you to go bankrupt.
These are just three of the many questions that are asked of counselling companies every day. Call a good and reputable agency -you will find them friendly, non judgmental and a great source of free professional advice. Good luck moving your financial future forward.
Don Antle is a Deans List Graduate of the University of Western Ontario and a former senior executive in a Canadian Fortune 100 corporate life. He found the credit counselling industry in 2004, ran Canada’s largest Independent Agency and is now the founder and President of Options Credit Services Canada LTD. a full service credit counselling and debt consolidation company.