When you’re struggling with debt, there are many financial products directed at you as a solution. While some of them may work for you, it depends on your financial situation. Proceed with caution before jumping on a debt solution plan. Make sure you work with a professional you can trust, and that you know the full pros and cons of moving forward.
Some of the most common forms of debt relief include debt management plans and consumer proposals. We’re going to take a look at what they are and the pros and cons of both.
Debt Management Plans
Debt management plans are available to consumers who struggle to pay their unsecured debts, including credit cards, lines of credit, bills, and others. A professional Credit Counsellor contacts each of your creditors and asks them to agree to reduce interest rates or stop interest charges on outstanding debt, and then agree to a payment plan over a set time period to repay your debts.
Interest rates keep your debts growing and make it a challenge to catch up, so a successful debt management plan can help.
However, there are also some disadvantages to debt management plans.
1) Debt Management Plans Are Voluntary Agreements
One major disadvantage to debt management plans is that they are voluntary agreements made with your creditor. Any of your unsecured creditors could potentially ignore your request to renegotiate your debt.
By comparison, your unsecured creditors vote on a consumer proposal. If creditors representing 50% of your unsecured debts plus $1.00 agree to the proposal, all of your creditors are legally bound by its terms, even if they voted against the terms. It can make a significant difference if you are dealing with stubborn creditors or parties pursuing legal action to collect your debt.
2) R7 Credit Rating
Another downside to debt management plans is that you will receive an R7 rating on your credit report, the same rating you would receive in a consumer proposal. This is the second-to-worst rating you can receive for unsecured debt after an R9, which you receive in a bankruptcy. (The R8 rating refers to repossession and generally applies to secured loans.)
3) Debt Management Plans Do Not Eliminate Debt
Consumer proposals can save you more money and make it easier to repay your debt by actually eliminating a portion of your debt. Debt Management Plans do not usually include this kind of debt forgiveness.
Who Are Credit Counsellors?
Debt management plans are offered by Credit Counsellors. Credit counselling agencies may operate as non-profits or commercial ventures. While they are accredited through the Association of Financial Counselling & Planning, they are not regulated by the federal government the way licensed insolvency trustees are.
Should You Consider Debt Consolidation in Victoria?
Debt consolidation loans are another financial product directed at those who are struggling to pay their debt. They allow you to pay all of your unsecured debts across cards and make a single payment at a single interest rate.
It can be an attractive offer, but more often than not, debt consolidation loans don’t make sense for people dealing with unsecured debt. There are several pros and cons of consolidation loans that you should carefully consider.
You may wind up paying a higher interest rate on some debts. If you continue struggling to make your consolidation loan payments, you can dig yourself into deeper financial trouble.
First, do the math on all of your debts and their interest rates. Calculate how long it will take you to pay them off at the rate you are making payments. Now compare that to the terms of your consolidation loan. Often the time periods are set, and that can make them more expensive.
Also ask yourself what you’re going to do with your credit cards if you take a consolidation loan. Will you cancel your cards and other lines of credit, or will you be tempted to use them again? Debt consolidation loans make it easy to make the problem worse by using newly available credit.
Even if debt consolidation could work for you, there may be a more affordable way.
What Is a Consumer Proposal?
Finally, you should know what is a consumer proposal and whether it can work for you. Consumer proposals are laid out in the Bankruptcy and Insolvency Act and administered by licensed insolvency trustees.
There are several compelling upsides to using a consumer proposal:
- If the majority of your unsecured creditors agree to the proposal, all creditors are bound by the terms of the proposal.
- Consumer proposals stop legal collection actions against you.
- They immediately remove wage garnishees.
- They put a stop to all collection efforts, including being contacted by collection agencies.
- They stop interest charges from accumulating on your unpaid debts, a key factor in getting ahead.
- They can eliminate a portion of your debt depending on what you can afford to pay.
Consumer proposals cannot last longer than five years. Your monthly payments are based on what you can afford to pay based on your income. While creditors are often willing to accept eliminating some of your debt, if your consumer proposal is not accepted, your other insolvency options may be limited to bankruptcy.
One of the most frequently asked questions about consumer proposals we hear is how it affects your credit score and your ability to qualify for future loans. Credit counselling is provided as part of your consumer proposal process. Credit counselling shows you how to rebuild your credit score, use credit constructively, and avoid running into debt problems in the future. You can qualify for loans again and emerge from your consumer proposal prepared to handle debt.
Licensed insolvency trustees are the only professionals who can administer a consumer proposal. Talk to licensed insolvency trustees on Vancouver Island to see if you qualify for a consumer proposal, and if it’s the right path out of debt for you. Talk to a local licensed insolvency trustee about your options for paying back debt.