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Wednesday, November 14, 2012

Debt Management Plan – Pros, Cons and Options

Continuing in our Debt Management Series, we now have a better understanding of what a debt management plan is.  Today we will talk more about debt management plan pros and cons and what other options you may have.
Deciding if a debt management plan, or any other debt relief option, is right for you requires a careful consideration of your individual situation.  Make a list of your debts, how much you owe and how much you think you can afford to pay each month.  With that information in mind, consider these advantages and disadvantages of a Debt Management Plan (DMP).

Debt Management Plan advantages

  • A DMP is an informal arrangement with your creditors that allows you to avoid bankruptcy or other insolvency proceedings.
  • You make one lump sum payment to your not-for-profit credit counselling service agency and the monthly payment is usually less than you are paying now.
  • Creditors may freeze or waive interest payments reducing the total amount you will have to repay.  Often they will only agree to waive interest at the end of the plan assuming you have made all of your monthly payments on time.
  • A DMP may have less of an impact on your credit score (assuming you make your payments regularly) although a note is usually placed on your credit report stating that you are paying your account through a debt management plan.
  • If you choose your credit counsellor carefully, you will be able to take advantage of budgeting and credit management education to help you manage your finances better once your DMP is complete.

Debt Management Plan disadvantages

  • A DMP is an informal arrangement.  Creditor participation is entirely voluntary and they can change their mind.
  • It will not stop wage garnishments and other court proceedings.
  • You will need to pay back 100% of your debt plus an administration fee and likely some interest.
  • You will not likely be able to obtain new credit while enrolled in your debt management plan as a condition for reducing or waiving interest.
  • You will need to be sure you make all of your monthly payments.  If you are late you will potentially invalidate your agreement with your creditors and may lose out on any negotiated benefits including lower interest.
  • Missed payments under a debt management plan will affect your credit score and will likely remain on your credit report for up to 7 years.
  • You must do a lot of research to find a reputable and reliable credit counselling agency to administer your debt management plan.  You should beware of debt settlement companieswho offer too good to be true settlement programs.
If based on your personal situation and a review of these debt management plan pros and cons you feel that you are not able to pay back all of your debts, are dealing with the potential for a wage garnishment or may not be able to make all of your payments as suggested by your credit counsellor you may want to consider making a consumer proposal. Consumer proposals are a formal action under the Bankruptcy and Insolvency Act, administered by a Consumer Proposal Administrator. There are several differences between a consumer proposal and a debt management plan that may provide a better debt relief option for you.
The post Debt Management Plan – Pros, Cons and Options appeared first on Money Solutions Blog.

Thursday, November 8, 2012

Fewer Canadians missing loan payments but high debt still a concern

Fewer Canadians are missing or defaulting on loan payments according to a report from Equifax Canada.  This despite the fact that the average debt balance owed by Canadians continues to grow.
The number of Canadians missing loan payments fell to 1.22% in the third quarter 2012, the lowest level since before the recession.  This would seem like goods news except for the fact that Canadian debt levels continue to rise.  The Equifax report also reveals that non-mortgage consumer debt increased by 2.6%.  And according to Statistics Canada consumer credit continues to expand, increasing by 2.7% in August over the same month in 2011.
Nadim Abdo, Vice President, Consulting Solutions, Equifax Canada says seeing “serious delinquencies drop to a record low of 1.22 per cent is a very positive sign that consumers are doing a great job at managing their debt obligations”.
What the drop really says is that Canadians are managing to meet their monthly loan payments – not that they are managing their overall debt. Consumer debt levels have continued to burgeon in Canada with the debt-to-income ratio reaching a record 163% in the most recent quarter.
The main reason more Canadians are, for now, not missing more loan payments is because interest rates are at historical lows. The question becomes how will Canadians with too much debt be able to cope when interest rates increase? Will interest rate increases cause more Canadians to have to file bankruptcy in the long run because they are not reducing their total debt levels fast enough?
In the report Mr Adbo also states that “Debt is increasing at a slower rate, the actual delinquencies are improving, they’re going down. That to me actually shows responsibility of some sort.”  Mr Adbo adds “You could actually argue that people are paying off at least a bit of their credit card debt now.”
If your debt is growing, it’s growing.  Growing at a slower rate on a much larger number is still something to be concerned about.  Eliminating high interest credit card debt is only the first step in managing debt. Shifting debt from one form to another is not a long term debt solution. The overall objective should still be to reduce your debt in total.
So while the Equifax report gives some hope that Canadians are, for the moment, able to meet their loan payments, these findings unfortunately are just an interest rate hike or unemployment rate increase away from reversing.  And at the moment, the risk of either of those events happening in the near term remains high.
The post Fewer Canadians missing loan payments but high debt still a concern appeared first on Money Solutions Blog.

Tuesday, November 6, 2012

Pay Off Debt or Save Money: Which is Better?

Like many Canadians you may have been hit hard by the recent recession. You have seen your personal savings account dwindle as your family income dropped or worse, your debt levels rise in order to make ends meet. Now you are back to work and you are facing a financial dilemma: pay off debt or restore your savings.
Canadian debt levels are at record highs and you hear warnings that Canadians need to take control of their debts. Not worrying about your debt can have serious repercussions, even bankruptcy. You know that it is important to pay off debt but should it be your only priority?

When To Pay Off Debt First

Paying off debt should be your first priority if you are already struggling with your bill payments. If your monthly debt payments are higher than you can afford on your income then you need to get these debts under control. If your sink is overflowing clearly you are not worried about whether you need to restock the pantry right now. You need to deal with the emergency and if you can’t pay your bills each paycheque then that is your emergency. There are ways of dealing with your debts including budgeting and focusing on eliminating credit card debt that will help you pay off debt faster. If you need help, consider contacting a not-for-profit credit counsellor or trustee in bankruptcy for advice. Both can help you with alternatives to avoid bankruptcy.
Even if you are managing to meet all of your bill payments, if your debts bear a high interest cost (credit card debt for example) then paying off this debt first makes sense. It will lower the amount of your income your lose to interest costs and quickly improve your overall cash flow making more money available for savings in the long run. Paying 18% on a credit card balance while you earn 2% or less on your savings does not make good financial sense. Another option may be to refinance your high interest credit card debt with a debt consolidation loan at a much lower rate. This will reduce your overall loan payments creating extra cash flow that you can put into savings.
If you are loosing sleep, or stress over your debts is affecting your personal relationships, then you may want to focus on a plan to pay off debt until you are feeling more comfortable. If you think you may need to apply for a loan in the near future (perhaps a mortgage or car loan) and are trying to improve your credit score and debt ratios than again, you may want to make paying off debt your number one priority for a while.

When To Consider Saving

It’s an alarming finding, but Canadian’s are heavily reliant on credit for unexpected emergencies. A recent study by Hoyes, Michalos & Associates, an advisor at, showed that 92% of Canadians would need to rely on some form of borrowing to come up with $2,000 for an emergency. If your debts are manageable, you should set aside extra cash flow towards an emergency fund rather than pay off debt faster. This is a temporary priority until such a time as you build up a large enough emergency savings. Typically advisors recommend that you set aside enough funds to cover six months of expenses.  This is particularly important if you have experienced income loss in the past due to economic factors and are concerned that this may happen again. You should also set aside enough funds to cover off unexpected events like a car repair or small house repair.
The best approach is a balanced approach.  Have a long term plan to pay off your debt, ensure you have an adequate emergency fund and focus on your savings for the future.  And once you pay off your debt, keep them paid off.
The post Pay Off Debt or Save Money: Which is Better? appeared first on Money Solutions Blog.