Bankruptcy Versus a Debt Management Plan

Many people know that bankruptcy can be a great relief in solving their financial challenges. It is not uncommon for people to explore many different options before they start the bankruptcy process and one of these is often a debt management plan. 

What are Debt Management Plans?

Debt management plans are programs credit counselors offer to help borrowers maintain control of their unsecured debt. The borrower makes one payment every month to the credit counseling agency, and the agency then divides it between the creditors the consumer owes debt to. When working on a debt management plan with a credit counselor, the process is usually as follows:

• You will collect all details of your different loans and credit accounts and share that information.
• Your credit counselor will then negotiate with all of your creditors, coming to an agreement on what you will pay each month. 
• You will then sign the agreement confirming the lower amount negotiated and payment terms over a certain period of time. 

What is Bankruptcy?

Bankruptcy is a legal procedure in which you assign (or surrender) your property to a Licensed Insolvency Trustee as part of a process that relieves your debts. Based on Canadian regulations you are permitted to keep certain assets, and exemptions are dependent on where you live in Canada. 

Declaring Bankruptcy

In Canada, only a Licensed Insolvency Trustee can file the paperwork for bankruptcy. When you declare bankruptcy, you meet with a Trustee to discuss your situation. If bankruptcy seems the most beneficial course, the Trustee will prepare the paperwork to file for bankruptcy. 

Once the paperwork is signed, your Licensed Insolvency Trustee will electronically transmit your bankruptcy information to the Office of the Superintendent of Bankruptcy in Ottawa (a division of the federal government). The Superintendent of Bankruptcy will inform the credit bureaus of your bankruptcy.

Within five days of the bankruptcy starting, your Trustee will send a copy of your bankruptcy paperwork to each of your creditors, so that they can file a claim with the Trustee.

Creditor Protection

Once your bankruptcy is filed creditors and debt collectors can no longer contact you or try to collect on the debt. With a debt management plan, however, your creditors can still contact and harass you about your debt. 

Forgiving Debt 

People generally consider filing for bankruptcy because they want to eliminate some of their debt. In some cases, declaring bankruptcy can be the best option allowing you to start over with a clean slate. The bankruptcy process lasts about 6 to 9 months overall. 

When it comes to a debt management plan your credit counselor will work with your creditors and other debt collectors to negotiate forgiven fees and reduced interest rates, but the amount of debt is not usually lowered or eliminated.

Impact on Credit Score

If you are in debt, any action you take will impact your credit score. A debt management plan will appear on your credit report, although it will not affect your credit score. 

Filing bankruptcy will definitely have a bigger impact on your credit score, but it will be shorter. As bankruptcy remains on your credit report for seven years from the date you filed, if you complete the payment plan. 

We hope this information helps you to determine the best course of action for dealing with your financial challenges. Regardless, you should give yourself a pat on the back for taking the first step in conquering your debt. 

Regardless, if you are feeling financial stress and don’t know where to start, we’re here to help. With Bromwich+Smith you are never alone and we ensure that our expertise will leave you feeling hopeful and confident. Call our Licensed Insolvency Trustees today for a free, no obligation, confidential consultation 1-855-884-9243. Let’s see you flourish!