What is a Debt Management Plan?
When consumers find themselves in too much debt, they may consider a Debt Management Plan (DMP) to help pool their unsecured debts together and consolidate. However, a DMP isn’t always exactly what it seems. It could have some pretty serious down sides for some individuals. Read on to find out what a Debt Management Plan in, how it works, and what other alternatives you have to managing your overwhelming debt.
Living with debt is difficult. Debt can leave consumers feeling stressed all the time, impacting their personal and professional lives, as well. Debt isn’t something you should continuously carry with you. You need to find a solution to your debt problems before they ruin your credit and you lose assets. If you’re struggling with debt, you may be considering lots of different options to get out of debt. A Debt Management Plan is one option, but how much do you know about it? Here is some more information about a DMP and how it can work for you.
Why Would I Need a Debt Management Plan?
If you are suffering from a debt that is growing rather than declining, you maybe have a debt problem that is too big for you to handle on your own. If you can no longer afford the minimum payments on your bills, your credit score is dropping, or you are using 40% or more of your disposable income to pay off debts, you are in need of financial assistance to get back on track. Here are some signs you need to consider getting professional help from a finance exert to help deal with your debts:
- Banking institutions will no longer give you a loan
- Your credit cards are all maxed out
- Your minimum payments exceed what you can afford to pay
- While paying your debts every month, you are still incurring more
- You are running out of assets to use for collateral
- Don’t have an adequate source of income for the amount of debt you have
- You need more cashflow to get through your day-to-day experiences
If your debt has become too much for you to bear and you are unable to get ahead of yourself, finish paying your debt, or save necessary funds, it’s time to seek some sort of debt counselling.
How Does a Debt Management Plan Work?
A Debt Management Plan (DMP) is a financial plan created on your behalf by a third party, not-for-profit credit counselling agency. Essentially, this is a repayment program created by the credit counsellor. They collect your month payment and distribute the funds to each of your creditors. They do not lend you anything to make payments to your creditors. Credit counsellor simply complete the process for you within a five-year period.
If your debt is too big to be paid off in five years, you may not be eligible for a DMP. In addition, the credit counselling agency must reach out to each debtor to see if they accept the DMP plan. Some creditors may be ok with this as it means they will most definitely receive their funds. However, some creditors who are expecting payment sooner, may not approve the DMP.
You may also need the credit counselling agency to settle some debts for you. This means they will have to contact debtors and see if they are willing to reduce the amount. Depending on the creditor, this may or may not be possible. Overall, your one payment to this third party will likely be below the minimum creditors were expecting.
Does a Debt Management Plan Hurt Your Credit?
Yes, a Debt Management Plan can dramatically affect your credit score. Because you are paying less than the required monthly minimum and are asking a third party to essentially navigate your debt for you, your credit score will take a hit. A DMP on your credit file will make ineligible for many things, including loans from traditional banking institutions, car dealerships, or other places.
Damaged credit can have a multitude of effects on your financial life. Aside from not being able to secure a traditional loan, you may not be able to secure rental housing or get a new job or promotion with bad credit. Even if your credit improves, a DMP on your file will remain for seven years and can dramatically affect your life until it is removed after the seven-year period.
What Does a Debt Management Plan Do?
Essentially, a Debt Management Plan is a way of telling creditors that they will receive their funds because the payments are being handled by a more responsible third party. The payment plan is developed by the credit counselling company and they present to your creditors on your behalf in an effort to reduce your debt or make it easier for you to pay.
To be accepted for a DMP, you must meet certain criteria:
- You must be earning enough to make the payments to your creditors within 5 to 10 years
- Your creditors agree to accept the DMP
- You unsecured debt must be a minimum of $5,000
- You may have to cash out equity to be able to qualify
How Long Does a Debt Management Plan Last?
A typical DMP lasts anywhere from five to 10 years. Of course, this will be settled by the credit counselling agency you seek help from. If your income increases, you may be able to pay your debt down sooner. However, if you lose income, your DMP may have to be re-evaluated as you will no longer be able to make the agreed upon payments. This can dramatically affect how long your DMP will last. To determine the correct length of time for your individual needs, you will need to consult with a credit counselling agency to see what type of plan they can offer you.
If you owe a lot of money – say upwards of $50,000 – the payment plan suggested by your DMP may mean you have very little disposable income left for anything else. This is something that you need to thoroughly evaluate before moving forward with a Debt Management Plan. Aside from the damage to your credit, it may make your life difficult by siphoning all of the fund you have coming in.
Is Debt Management Right for You?
A Debt Management Plan may be beneficial for some people, but it isn’t for everyone. Before you commit to one, you should definitely sit down with a financial advisor to see what all of your options are. DMPs and bankruptcy should be considered your ultimate last resorts simply because they come with enough consequences to make them less desirable. If you are out of options, you may think a DMP is your only solution right now. But before you make any decisions, meet with a financial expert at BHM Financial.
Our finance experts can introduce you to a series of other options that may be less damaging to your credit and more flexible with your lifestyle. Did you know that applying for an unsecured debt may initially impact your credit score, but in the long term, it can actually improve it as you continue to make your monthly payments? A DMP on the other hand will have financial consequences on your credit file for the full seven-year period before it is removed.
Debt Management Plans may be an option, but they aren’t the only option. Before tying your hands with a long-term financial decision, it is always best to explore all of the options available to you and weigh the pros and cons of each. There just may be a better solution for you.
What Other Debt Options Do I Have?
When you meet with a financial expert at BHM Financial, you will get access to all of the debt solutions we have that may work better for you than a DMP. Here is a look at some of loan options you can turn to for help if you are struggling with debt:
Bad Credit Personal Loan
When you have a large amount of debt and bad credit, it’s basically understood that a traditional banking institution will not be too eager to loan you a dime. At BHM however, we never base our loan decisions on your credit. That means if you happen to have bad credit or a huge debt load, we won’t automatically refuse you. You can actually acquire a same day bad credit loan to get the cash you need to get creditors off your back.
Debt Consolidation Loan
If you are paying the bare minimum to a dozen debtors, you aren’t really getting anywhere. The minimums won’t allow you to get ahead quickly enough to pay down those debts. A debt consolidation loan will pay off all of your creditors at once and reduce you to one single monthly payment. You’ll actually save on interest by consolidating your debts, as well.
Home Equity Loan
A home equity loans allows you to leverage the value of your home by borrowing against it. Used as collateral, your home will allow to transform unsecured debt into secured debt. Initially, this will have a minimal impact on your credit score. However, once the debt becomes secured and you continue to make your payments, your credit score will instantly begin to improve. This is because paying on time boosts your score and secured debts don’t impact it, as unsecured credit card debt does.
RV, Boat, and Car Title Loans
If you own an RV, boat, or a car that is fully paid, you can borrow against it to pay down your other debts. These assets can be used as collateral so you can quickly get the cash you need to pay off creditors as quickly as possible.
By meeting with a BHM Financial expert, you’ll be able to learn more about these options, as well as others. Then you can make the best financial decision for your future. Our goal is to help you get your debts pay off, while still allowing you to live a reasonable lifestyle.
What is the Best Way for Me to Get Out of Debt?
The best way out of debt is to start by securing funds through a loan to pay off your biggest creditors. For example, if you owe money to the Canada Revenue Agency, you don’t want that lingering around. The CRA has the power to seize your assets and your pay directly through your employer to get their missing funds.
Before you end up in a situation like that, it’s best to get a loan to ensure such creditors are pay and will not be bothering you for money. Consolidating your loans will not only get all of these creditors off your back, but it can also help by reducing your overall interest rate. Plus, our BHM Financial experts will work together with you to develop a flexible repayment with terms you can actually follow. The goal is to make the payments affordable for your income so you can stop missing payments and start improving your credit score immediately.
How Can BHM Financial Help Me Get Out of Debt without a Debt Management Plan?
With the loan options we offer, BHM can help you get out of debt with minimal impact on your credit rating, unlike a DMP. There is are loads of options that each have their own advantages. We also offer loans directly, which means there is no third-party lender that we need approval from. We approve our loans and we lend the funds out. That means we can approve your loan request fast.
Within one business day, you can apply, receive your approval and get the funds in your hands! By leveraging what you own and building a flexible repayment plan with you, BHM can help you pull yourself out of debt and get back on the right track towards financial freedom.
A DMP isn’t the only option you have left. Meet with one of our experts for a consultation today to see how we can help you pay down your debts, start saving again, and get your credit score back in great shape.
How Do I Stay Out of Debt?
It can be challenging because sometimes, the unexpected happens and no matter how much you’ve planned ahead, you could still find yourself in debt. However, there are some things you can do to minimize your risk of falling into the cycle of debt again. Here are our top tips:
- Reduce the number of credit cards you have and the limits on them
- Keep track of your spending on a weekly basis through a spreadsheet so you can follow your spending habits, budget for necessary costs, and plan appropriate savings
- Save up a contingency fund that has at least six months’ worth of necessary expenses (housing, car payments, food, and other essentials)
- Live below your means
- Invest money in appreciating assets rather than depreciating assets
- Meet with a financial expert on a regular basis to assess your financial habits and needs
- Ask for help when you need it – before you get overwhelm by debt
How Can BHM Financial Help Me in the Long Term?
BHM Financial is a lender, but our experienced staff are also experts in the finance world. They can provide you with the tools and knowledge you need to gain financial success. After assessing your debt load and explaining all of your options to you, our financial experts will work with you to create a repayment plan that is flexible enough for you to live a reasonable lifestyle.
As the next step, our financial counsellors can help you create a budget that will allow you to pay down your debts and save some money for your future. Our goal at BHM is to help you get out of debt and then stay out of debt! Giving you the financial knowledge you need to succeed is our priority.
With the right financial knowledge, you can plan ahead, pay down your debt successfully, and avoid getting into debt again in the future. Learning how to budget and save, how to understand loan products, and how to navigate a tough financial crisis can help you manage your finances and head closer and closer to financial freedom!
When Should I Call BHM Financial?
If you are suffering from an overwhelming load of debt and think you’re all out of options, it’s time to give us a call. If your credit score is taking a hit because you can’t afford your minimum monthly payments, you need financial aid to help you get back on track. Call us today to book a consultation with one of our financial experts so you we can help you understand all of the options you have besides a Debt Management Plan or bankruptcy.
We can help you get easy access to the fund you need to start paying off those stressful debts and rebuilding your credit. Don’t wait until your credit score hits rock bottom and your debt becomes too heavy. Call us today and see how we can help you pay off your debt and save on interest in the long run!