Credit counselling, also called a debt management plan, may be a solution if you do not owe a lot of money to your creditors. It may also be a solution if you have fallen behind on your payments, or were unable to pay your creditors for awhile but feel you are able pay them in full now.
Here’s how it works: A credit counsellor will contact your creditors and help arrange a debt management plan that allows you to repay your debts in full over a period of time. This arrangement is voluntary and is not legally binding on you or your creditors. A credit counsellor is not able to settle your debts for less than the full amount owing, but is often able to negotiate a lower interest rate during your repayment period. A debt management plan will not work if you have a tax debt with Revenue Canada. A debt management plan will be reported to the credit bureau and will reflect negatively on your credit record.
If you feel that you have the ability to repay your debts in full but need help dealing with your creditors then your next step should be to contact a credit counsellor. Finding a reputable credit counsellor is not always easy. If you do an internet search for credit counselors in your area, you will likely get hundreds of hits. Word of mouth or a referral is a good way to find someone. We have a list of credit counsellors that we have dealt with personally, and we believe they are highly reputable.
When looking for a credit counselor, there are a few things to keep in mind. First of all, how much will you pay in fees? Is there an up front consultation fee? Annual or monthly “membership” fee? Monthly service fee? When you call to make your first appointment be sure to ask if there is a consultation fee.
Also, it is not a good idea to start making debt management payments until your credit counsellor has confirmation from each of your creditors that they are willing to participate in the program and exactly how much they agree to accept each month. I often meet with people that have entered into a debt management plan and after making several monthly payments, their credit counsellor contacts them to tell them that their monthly payment will need to be increased. This happens because one or more of your creditors did not accept the amount that the counsellor offered them initially and will only agree to your debt management plan if you increase your monthly payment. Beware of debt management scams where the debt consultant takes your money, but doesn’t actually do anything.
Is credit counselling a solution? Say you owe $15,000 to your creditors. If you decided to pay down this debt on your own over three years, you could expect payments of approximately $680 a month. If a credit counsellor could get all of your creditors to agree to stop interest and allow you to repay this debt over three years, you could expect to pay approximately $420 a month. Seems like a good solution. You know you can make payments of $420 a month because you are paying more than that each month to your creditors now. Unfortunately lot of people I meet with are unable to maintain their debt management payments because they underestimated the amount of money they have available after paying all of their living expenses.
A debt management plan is a good solution if you can afford to pay all of your debts in full, but just need a break on the interest. If you can’t repay the debt in full, a better solution may be a consumer proposal. A consumer proposal is a settlement of your debts and is legally binding on all your creditors, including Revenue Canada. A consumer proposal ensures that all of your creditors are treated fairly; one creditor does not have the ability to demand a higher payment than your other creditors. A consumer proposal can only be filed by a licensed Trustee; a credit counsellor cannot file it for you. The payments in a proposal on that same $15,000 of debt would be significantly less than a debt management plan, possibly as low as $200 a month for 36 months.
Understanding your options will help you pick the solution that works best for you. Since everybody’s situation is different and there are many factors to consider when deciding your best route, it is best to seek advice from a professional.
There are options, so let’s get started.