Debt Management Programs - a win-win situation

Sue and Doug are the first to admit how difficult their debt problems have been. Continual anxiety about paying bills and making credit card payments can make life unbearable. However, this time Doug and Sue are determined to take charge of their financial situation.

For years, this couple has lived beyond their means, ignoring the financial danger signals and fooling themselves into thinking their situation will improve. Now bill collectors are demanding money and their debt secret is about to be revealed. Sue and Doug are prepared to take whatever measures necessary to have complete control over their financial lives — even if it means declaring bankruptcy.

Credit counselling

Credit counseling sessions usually begin with an assessment interview, followed by a review of all the possible financial solutions. These are unique for each client.

In order for Doug and Sue to get a clear picture of their financial situation, they create a list of their assets and their total household income. Then they prepare a list of their regular expenses (expenses that are paid every month) and their irregular expenses (expenses that are paid annually). Doug and Sue are shocked at the results of their total expenses. The couple discovers their monthly living costs currently exceed their income, even before they have made any consumer debt payments. The twosome have been using credit to balance their budget each month. Using credit to pay credit results in a larger debt load. The chart below shows that they are short nearly $1,250 per month.

Monthly Cash Flow
Total family net income (take-home) $2,750
Living expenses $2,865
Debt payment $1,135
Total monthly expenses $4,000
Monthly shortfall ($1,250)

Doug and Sue are also very surprised to learn how much their total debt load is. They have almost paid off their bank loan, but since they have never added up their total debt load, they hadn’t realized how much money they actually owed. Together, we go over their monthly credit statements and Doug and Sue realize that their credit card balances are increasing. Despite their sporadic payments and recent purchasing restraints, some of their cards are over limit.

In addition to high interest rates, several companies levy a surcharge fee for over-limit and late or missed payments. Not including the interest cost, these extra fees can exceed $25 per statement. One of Doug and Sue’s creditors has raised their annual interest rate from 18 to 23%, due to the fact that they are behind in their monthly payments. The seriousness of the situation is now becoming clear to the couple.

“How are we ever going to stop this?” Sue cries, as the tears start to flow.

A financial analysis

A financial analysis includes a complete list of total income, living expenses, and debts.

Firstly, a credit counsellor will look over the client’s budget and decide what will be the most effective method in creating a balanced document. There is no such thing as a ‘right’ or ‘wrong’ budget, although your budget, income and expenses must balance. Together, Sue, Doug and I go over their income and expenses, in order to determine what they can afford on a monthly basis. It is apparent that they will be required to reduce their living expenses and increase their income — or do both. They know that the potential for increasing their income is very good: Doug has found a new job and the couple will cut back on their living expenses.

To start this process, it’s decided to reduce any extra expenses such as gift giving and eating out. The couple resolve to bring a packed lunch from home each day and Doug won’t be purchasing his morning coffee at Starbucks anymore. Also, they won’t be taking their annual vacation until their financial situation improves. They propose to cut expenses further, by dropping their cable TV and some extra entertainment.

Before encouraging Doug and Sue to make any more sacrifices, I suggest that they take some time to consider the implications of these changes. They must decide what other actions they might take to reduce expenses as we start this new program. One of the solutions discussed for Sue and Doug is a Debt Management Program (DMP). A DMP is a consolidation of payments; it is not a loan.

A DMP is a voluntary repayment program set up by a credit counselling/debt pooling agency (licensed by the Government and operating under a bond). DMPs are designed to have the client debt free in four or five years maximum. Studies have shown that programs designed for longer terms are less likely to succeed. All money received by the credit counselling service is deposited into a trust account. The money is usually paid out once a month, for the benefit of the creditors.

Debt Consolidation Programs ask the creditors to reduce or stop the interest charges on the accounts. Most creditors agree to stop interest charges, because they want to assist the client to repay the debt. DMPs are a “win-win” situation for both the debtor and the creditor. Both Doug and Sue are encouraged to know that they have several options available to them.

Final Thought: If what you read in this article makes sense, why not tell a friend! You'll be glad you did because they'll be glad you did.