What is a Debt Management Program?
A debt management program is a voluntary repayment program that can
combine all of your unsecured debt in to one monthly payment. A
repayment proposal is sent out to your creditors offering a monthly
payment plan at zero percent interest over the course of 5 years. This
is a good option for people that don’t want to claim bankruptcy but have
to much debt to handle. Most creditors in Canada will accept a debt
management program but not all will grant you zero percent interest. As
the debt management program is voluntary both on your part and the part
of your creditors there is nothing binding them to giving you zero
percent. Some creditors will grant you zero percent, others will charge
you partial interest and some will charge full interest.
Because debt management is a voluntary debt repayment program there are no guarantees of what will happen once the proposal is sent to your creditors. Essentially your creditors can accept the program or decline it or give you interest relief or not. With that said, the majority of creditors are pretty good when it comes to a debt management program and often do accept. Once the proposal has been accepted you will have 60 months or less to pay your debt back.
How does a Debt Management Program affect my credit?
A debt management program will affect everyone’s credit score differently but the one common thread that there is with a debt management program is that your accounts are listed as an R7 in the credit bureau which means that you have entered into voluntary repayment of debt or court appointed payment plan. In the case of a debt management program it would be a voluntary repayment of debt. The R7 will last on your credit bureau for three years from the date of final payment.
As an example, if you pay your debt through a debt management program and complete it in 3 years the R7 will remain on your credit report for a total of 6 years. 3 years for the repayment term and the additional 3 years from the date of final payment.
Do creditors accept a Debt Management Program? Yes, all the time. Debt management programs are one of the most common ways to consolidate your debt because there are no credit checks to enter into a debt management program. If you have debt, you can file a debt management program. Just be aware that you will lose all of your revolving accounts and that it will have an impact on your credit.
What is the cost of a Debt Management Program?
The cost of a debt management program really depends on what type of Debt Management firm you choose as there are two types. The first is a not for profit organization and the second is a for profit organization. We’ll look at the not for profit first.
A not for profit organization may seem like the cheaper route to go but don’t be fooled by the term not for profit, these firms most certainly make money and in a lot of cases its more than a for profit organization. A not for profit organization will charge you a minimal monthly fee to access there client service area but don’t charge upfront fees or retainers. They are in essence paid by the creditors. A not for profit organization is paid 20% of your monthly payment. Basically if you pay $1,000 to a not for profit organization they will send that $1,000 to your creditors and in turn those creditors will then send 20% back to the not for profit organization.
On the other hand, you have a for profit organization. A for profit organization will charge you the client directly and does not receive funds from your creditors. The cost for a for profit organization is typically 15% of your monthly payment. In some cases they will charge a small retainer to set up your account but its typically equal to your first months payment and is not an absorbent amount.
What is the difference between for profit and not for profit?
The main difference between a for profit organization and a not for profit organization is the fact that a not for profit organization is paid by your creditors and a for profit organization is paid directly by you. As far as the programs are concerned they are ultimately the same program. A voluntary repayment program that will pay your debt out in 60 months or less.