Do you have a lot of debt? Are your monthly payments too high? If your debt is getting out of hand and you feel like you can’t control it anymore, enrolling in a debt consolidation program could be the solution you’ve been looking for.
But we also completely agree that the unknown is scary. Having some basic knowledge about the inner workings of a debt consolidation program will allow you to take full advantage of it and hopefully achieve all your goals. This is why we want you to know what to expect when enrolled in a debt consolidation program before you make your final decision.
Don’t know if you have a debt problem? check out when is the right time to speak to a debt professional.
What Is A Debt Consolidation Program?
A debt consolidation program or debt management plan (DMP) is an informal proposal that is administered by a credit counsellor. The goal of a debt consolidation program is to consolidate your debt and reduce your payments into one affordable monthly payment. However, it is important to remember that, the goal of a debt consolidation program is not to eliminate debt. It simply reforms it so that it is more affordable. In some cases, however, it may eliminate some of the debt you owe or pause any accruing of interest.
Debt Consolidation Program vs. Debt Consolidation Loan
A debt consolidation program, also known as a Debt Management Program (DMP), should not be confused with a debt consolidation loan. While a DMP is an informal proposal that is administered through a credit counsellor, a debt consolidation loan is simply a loan that you apply for with a lender to consolidate your debts.
Here are some of the key differences between a debt consolidation program and a debt consolidation loan.
| Debt Consolidation Program | Debt Consolidation Loan | |
| Process | Your credit counsellor will negotiate a debt consolidation plan with your creditors. | You must apply for a loan with a lender. |
| Legality | While your creditors are not legally bound to the contract, they agree to the proposal set by your credit counsellor. | You’ll be bound to your new loan. Any missed payments will affect your credit. |
| Interest | Depending on how your credit counsellor negotiated, you may or may not have to pay any extra interest on your balance. | Your lender will set an interest rate that you must pay to pay off the loan. |
| Eligibility Requirements | You do not require anything to enter a debt consolidation program. However, you must be able to afford the debt consolidation payments. | To qualify for a debt consolidation loan, your lender will have certain requirements regarding your credit score, income and debt level. |
How Does A Debt Consolidation Program Work?
Unlike more drastic forms of debt relief like a consumer proposal or bankruptcy, a debt consolidation program is not a legal process. Instead of working with a lawyer or a Licensed Insolvency Trustee, you’ll work with a certified credit counsellor who will help you through the entire process.
The purpose of a debt consolidation program is to consolidate your eligible debts into a more manageable monthly payment. Generally, when entering a debt consolidation program you can expect:
Meeting The Credit Counsellor
Your main goal when meeting with your credit counsellor is to provide them with as much information about your finances as possible, the more information they have, the better they’ll be able to help you. Your credit counsellor will require information regarding your income, expenses and debts. So be sure to bring along your bank statements and other financial records. With it, your counsellor will:
- Figure out exactly how much debt you have
- Create a budget that covers all your debt, expenses, and income
- Negotiate with your creditors and come to an agreement on a monthly payment
- Provide you with the tools and knowledge to deal with any future financial issues
The Negotiation
The credit counsellor who you work with will negotiate, on your behalf, with your creditors and lenders in hopes of:
- Reducing your interest rates and/or eliminating any penalties you might incur or have already incurred.
- Extending the time required to pay off the debt (up to five years)
This way you can continue to afford all the necessities of your life while working toward your goal of being debt-free.
The Payment
If your creditors agree to your credit counsellor’s proposal, you’ll begin making payments. These payments are paid to your credit counsellor who will then distribute the payment to your creditors. Once you’ve completed the program, you’ll be debt-free, however, your credit will be negatively impacted for 2 years after you’re done with the program.
What Types Of Debt Can Be Consolidated With A Debt Consolidation Program?
A debt consolidation program is a great option for many consumers who struggle to keep up with the cost of being in debt. With that being said, not all types of debt can be included.
Generally speaking, only unsecured debts can be consolidated such as credit card debt, personal loans, and unsecured lines of credit. However, in some cases, you may be able to add your secured debt.
- Credit Card Debt – Credit card debt is unsecured which means it is eligible to be included in a debt consolidation program. In fact, credit card debt is one of the most common reasons why consumers choose this form of debt relief.
- Unsecured Personal Loan Debt – Personal loans that are unsecured, meaning when you originally took out the loan you didn’t have to put up any form for collateral like a vehicle, can also be included in a debt consolidation program.
- Auto Repossession Debt – If your vehicle has been repossessed because you were unable to keep up with the payments, you may be able to include that debt.
- Non-Government Student Loan Debt – If you have private or non-government insured student loan debt that is causing you too much financial stress, entering a debt consolidation program might be a good option for you.
- Past-Due Cell Phone/Utility Bills – If you have a past-due cell phone or utility bill and you’re no longer using the same service, it’s possible that you can include that debt in a debt consolidation program
- Medical Bill Debt – Not all medical bills are eligible to be consolidated, but some are. If this is the main reason why you are considering a debt consolidation program, we recommend that you seek the advice of a credit counsellor first.
What Are The Benefits Of A Debt Consolidation Program?
A debt consolidation program is a great option for those who can’t afford to keep up with their monthly payments. It will allow you to work toward paying off your debts and regaining some control over your financial life. Let’s look at some of the benefits of joining a debt consolidation program.
Reduce Your Monthly Debt Payments
Depending on your financial situation and how much debt you have, you could see a reduction in your monthly payments by as much as 50%. However, do remember that doesn’t mean they’ve eliminated the debt you owe but rather had it reduced by extending your payment term. Similarly, your credit counsellor may have been able to cut or reduce the interest you owe, meaning more of your money will be going toward paying off the principal rather than the interest that is accumulating.
Click here to see which mistakes to avoid when paying off your debt.
One Easy And Affordable Payment
Another advantage of a debt consolidation program is that you’ll only have to worry about making one monthly payment. You’ll make your payment to the credit counsellor who you’re working with and they will distribute the money to your creditors accordingly.
Certain Penalties And Fees Are Waived
Once you enroll in a debt consolidation program your credit counsellor takes control of your debt and negotiates with your creditors on your behalf. Your counsellor might be able to get certain penalties removed, fees reduced or charges waived. Certain fees may have to be paid no matter what, but it never hurts to have a professional working to help you get the best deal possible.
Debt Is Paid Off Quicker
Because your counsellor works hard to consolidate your debts and get reductions on fees and interest for you, it allows more of your money to go toward paying off the principal of your debt instead of the interest that your debt accumulates. This in turn will allow you to pay off your debt quicker and at a lower cost.
Avoid Black Marks On Your Credit History
One of the best parts of a debt consolidation program is that you’ll be avoiding a more serious financial issue, like bankruptcy. Bankruptcy is often the best choice for certain people but if it can be avoided, it should be. With a debt consolidation program, you’re still paying off your unsecured debts in full which means your credit history won’t have the big black mark of bankruptcy on it.
The Disadvantages Of Debt Consolidation Program
As with anything in life, everything has its advantages and disadvantages. A debt consolidation program is no exception. This is why it is important to understand what debt consolidation is and if it is the right choice for your situation. Here we’ll go over the disadvantages so you can make an informed decision.
- Voluntary Program – A debt consolidation program is voluntary and therefore not legally binding which means that your creditors can opt out at any time.
- They Can Still Contact You – You won’t have any protection from your creditors and they can still contact you or send collection agencies after you.
- No New Credit – You will not be able to open any new lines of credit or apply for new credit cards; if you do it could hurt the success of your program. Before you decide to start a debt consolidation program make sure you won’t need any kind of new credit in the near future.
- Delayed Start – Your debt consolidation program might not take effect for a couple of months. This means that your creditors won’t receive your payments right away. You should continue to make regular payments on your bills so that you won’t miss any payments.
Cost Of A Debt Consolidation Program
Depending on the credit counselling agency you work with, the fees for their services will vary. To ensure a debt consolidation program is worth your while, be sure to calculate how much it costs versus how much you’d save in interest from consolidating. In general, you can expect your credit counsellor to charge you the following fees:
- initial set-up fee
- monthly maintenance fee
- application fee
- membership fee
- upfront fee or fee for each creditor
If you’re unable to afford their service, you can ask if they can reduce the fees. Some credit counselling agencies adjust the fees according to your financial circumstances.
How To Know If You Need Debt Relief?
When it comes to your debt you are your own expert. Thinking that you feel like you need help means that you probably do. If you think asking for help is your best option, then ask for it.
If you’re losing sleep because of your credit card bills, if you’re having trouble concentrating at work because of a predatory payday lender or if you feel like your life is on hold because your personal debt levels just keep getting bigger, we want you to know that you’re not alone and there is help waiting for you.
Find out if you have too much credit card debt.
Help is available to all Canadians who are currently dealing with debt and we want you to take advantage of that help so you can start living the debt free life you deserve. Give yourself the best possible chance for a brighter financial future by doing some research and finding a debt consolidation program that’s the right fit for you.
Additional Reading
Debt Consolidation Program FAQs
How long is a debt consolidation program?
Are there any fees associated with a debt consolidation program?
What happens if my creditors do not agree to the DMP?
Getting The Debt Relief You Need
The sooner you enroll in a debt consolidation program the sooner your new debt-free life can start. Taking that first step and asking for help can be scary but we know that once you start you’ll be so happy you did. Becoming debt-free is a journey, one that will take a lot of hard work and effort from you. If you stick to the program that your credit counsellor creates for you, we know you’ll be able to achieve all your goals. The most important thing for you to do is learn from this experience, listen to your counsellor and work hard to get rid of bad financial habits and create new good ones.
