When you’re enrolled in a debt management plan, it’s important to navigate your borrowing options wisely. Understanding the possibilities and limitations of obtaining loans during this period can help you make informed financial decisions. In this article, we explore the borrowing options available to individuals on a debt management plan.
How Consumer Credit Counseling Can Assist with Debt Management
If you find yourself in a complex or even insurmountable debt situation, seeking the help of a consumer credit counselor can provide you with solutions to overcome these challenges and make better use of your finances. Below is an overview of the services they offer to individuals struggling to manage their expenses.
Carefully select your credit counselor
While there are reputable credit counseling agencies available, there are also companies that charge fees and make unrealistic promises, such as guaranteeing agreements with lenders or rapid restoration of a good credit score. Before contacting a consumer credit counseling agency, it is essential to verify their reputation through established institutions like Credit Counseling Canada. Alternatively, you can consult counseling services provided by associations such as the Union des consommateurs.
Benefit from credit counseling services
Consumer credit counseling agencies generally offer a range of services tailored to individual circumstances, including:
Group sessions on responsible credit usage, budgeting, and adherence to a budget.
Personalized and confidential credit counseling sessions to enhance your credit history.
Debt management plans.
Create a debt management plan
In certain situations, it is possible to develop a debt management plan that can incorporate credit lines, unsecured debts, and credit cards. However, it usually does not cover mortgage, auto loans, student loans, personal loans, and debts owed to government agencies like the Agence du Revenu du Québec and the Canada Revenue Agency. Secured debts are also excluded, as the lender can seize the associated property if debts remain unpaid. Nonetheless, a debt management plan can aid in loan refinancing.
The role of the credit counselor in the debt management plan
A credit counselor can create a debt management plan on behalf of the borrower. Essentially, this proposal is presented to the lenders to negotiate favorable terms. The plan allows borrowers to consolidate their loans into a single monthly payment, often referred to as a debt consolidation loan. The payment amount is aligned with their current income and financial situation. This process involves several steps:
The counselor evaluates the borrower’s situation and conducts an analysis to develop a program.
They collaborate with the borrower to create a budget and provide guidance on monthly debt payments. In some cases, the borrower may be required to sign a written commitment to refrain from obtaining additional credit.
The counselor negotiates with lenders and creditors to secure lower interest rates, reduced fees, and an extended payment schedule for the various debts.
Impacts of the debt management plan
It is important to note that obtaining a debt management program may initially have a negative impact on your credit score and affect your access to credit. However, in the long run, this solution enables you to reduce credit card debt, improve your financial situation, and enhance your credit rating, provided that you adhere to the plan by making regular monthly payments. At the conclusion of the plan, you may even be eligible to apply for a secured credit card, accelerating the process of rebuilding your credit.
Loan counselors may not always be the best solution
While consulting a loan counselor is one viable option for individuals facing financial difficulties, there are situations where it is advisable to seek the assistance of a trustee to establish a consumer proposal or initiate personal bankruptcy proceedings, especially if a portion of the debt repayment program is tax-related.