If Superman is known to struggle against Kryptonite and magic, an average Singaporean usually finds financial indiscipline and debt pile-up the hardest to deal with. The mentality of ‘buying now and paying later’ has gripped many. While it surely has its advantages, buying without a proper payment plan could land you into serious debt problems.
If you think that your debts have reached precarious levels and need immediate intervention, you could consider a debt consolidation plan (DCP), a debt management plan (DMP), or even a debt repayment scheme (DRS).
Let us take a closer look at each of these debt management tools separately in the following section and see what kind of impact they might have on your credit rating.
The government of Singapore along with the major financial institutions and think-tanks have tried to come up with checks and balances to arrest delinquency. The following plans are fruits of such efforts:
What You Need to Know About a Debt Consolidation Plan
A Debt Consolidation Plan (DCP) is a refinancing programme. With this plan, you could choose to consolidate the outstanding debts across all your unsecured credit facilities, barring a few. Medical loans, education loans, renovation loans, and business loans can’t be consolidated. In order to qualify for a DCP, you should be a citizen or a PR of Singapore. Also, your annual income has to be between S$30,000 and S$120,000, and the net value of your personal assets has to be less than S$2 million.
There is one more criterion. You may not be able to apply unless the value of your combined outstanding debt exceeds 12 times your monthly earnings.
This programme is offered by 14 financial institutions in Singapore and is monitored by the Association of Banks (ABS). You also have the option to refinance a DCP loan. However, you’ll have to wait for 3 months from the time you opened your last DCP loan account. At any point, you can have only one DCP loan account.
Most experts feel that it might help improve your credit score. That’s because when your older accounts are consolidated, they’re basically closed after debt settlement. As all these accounts show up on your credit report as ‘successfully closed’, chances are that your score would improve.
The other big advantage is that you might be able to enjoy lower interest rates with this loan. This could mean that your monthly instalments could come down, thereby improving your chances of settling the total debt faster.
If you’re applying for a DCP loan for the first time, you’ll also get an additional allowance of 5%. It’s basically for the charges that might incidentally be imposed between the period of submission of your application and the settlement of these debts. This could further ease your debt problems and make it easier for you to settle the loan. It goes without saying that this could certainly have a positive impact on your credit score.
Once you apply for a DCP and it is approved, you’ll no longer have access to your existing unsecured credit facilities. You’ll get a revolving credit facility with a credit limit equal to your monthly earnings, along with your DCP loan. Also, no request for a temporary credit limit increment will be entertained.
This is seen as a voluntary attempt on your part to inject greater discipline into your financial management.
According to information available on this ABS webpage, information related to a DCP loan will remain on your credit bureau report for 3 years from the time of closure of your last DCP loan account.
To make sure that your credit score actually benefits from your decision to consolidate debts, make all your DCP loan payments on time. Any default could not only mean higher interest charges and penalties but also means a strike on your credit score. Remember, once you start defaulting on your DCP, there could possibly be no other way but to settle matters in court with your creditors.
Everything said, you might realise that qualifying for a DCP loan is tougher than you had imagined. If your DCP application is rejected by a lender, it’s not the end of the road for you. You might still qualify for a DMP, which we’re going to discuss in the next section.
A debt management plan (DMP) is a monthly repayment programme. It’s an informal, voluntary arrangement that you get into with your creditors. The deal could be mediated upon by Credit Counselling Singapore (CCS), a charitable organisation that acts as a link body between creditors and borrowers.
If you get into this arrangement (there will be no legal obligation on part of your creditor to honour your request for a DMP), you’ll have to pay a fixed monthly instalment. You’ll have to service the actual principal and pay reasonable interest charges on all your outstanding debts.
It is a good option for those who’re willing to stay within a disciplined budget to make sure that they can clear their outstanding dues. Under the supervision of CCS, the arrangement will be such that you don’t find it impossible to service your loans, provided you stay within your means. You’re expected to make timely payments to your service loan accounts in full.
This voluntary and private arrangement between you and your creditors won’t appear on the public records. However, it could stay on your credit bureau reports for some time because the status of your DMP will be registered with CBS. All the member financial institutions will have access to this report.
Just like a DCP loan, a DMP arrangement could have a positive impact on your credit score. That’s because you’ll be making a proactive effort to clear your debts. It’s a good way to regain your creditor’s trust.
However, it may only have a positive impact on your credit score if you make full and prompt payments on time, i.e. you have to honour the arrangement at every step. If you fail to make payments on time, you could see a further slip in your credit score.
Be warned though that qualifying for a DMP may not be very easy. To qualify, you’ll first have attended the 2-hour Info Talk conducted by CCS from time to time. If you consider DMP as a viable option, you could submit a request form for private counselling. You’ll have to attend the session, provide all the relevant documents, and discuss your best options, under the current circumstance, with CCS. Once CCS has accepted your case as one that’s suitable for DMP, you might apply.
If you’re not eligible for DCP or DMP, you may want to try the DRS arrangement.
This is a pre-bankruptcy scheme. It is administered by the Official Assignee and supervised by a court in Singapore. It is governed by the Bankruptcy Act (Chapter 20).
If your total unsecured debts are less than or equal to S$100,000, you may enter into a Debt Repayment Plan (DRP) under this pre-bankruptcy scheme. It could help you avoid financial restrictions and social stigma, if any.
Once a DRP arrangement is established, you’ll be liable to make fixed payments over a period not exceeding 5 years. If you manage to settle the outstanding debts within this period, you’ll be released from your debt obligations. You can, thereafter, start with a clean slate.
You’ll have to file for proceedings in the High Court. The Court will then refer you to the Insolvency & Public Trustee’s Office (IPTO). An official assignee will then examine the suitability of your case for DRS. If you’re found to be suitable, the IPTO will then draw up a repayment plan for you. The plan will be approved with the consent from your creditors.
If you fail to satisfy the requirements of this scheme, the court may take up the adjourned bankruptcy application again. If you’re found to be unsuitable for DRS, you may have to face a bankruptcy order.
However, if you’re suitable for the plan, you comply with your statutory obligations, and make all the debt payments on time, you’ll receive a Certificate of Completion from the Official Assignee. You’re then considered to be free from your unsecured debt liabilities.
If you don’t honour your statutory obligations under the arrangement and fail to repay the debts owed to your creditors, the Official Assignee might issue you with a Certificate of Failure. In such a case, fresh bankruptcy proceedings may be initiated against you by your creditors.
When you’re on DRS, you may not face as many restrictions as you would face if you were on bankruptcy. Remember, that a plan devised by the IPTO is usually valid for a period of 3 years to 5 years. You must find a way to settle your debts within that period.
To be eligible for this plan, you must:
Must not be an undischarged bankrupt, didn’t have a voluntary arrangement with your creditors, and weren’t on DRS at least 5 years before the debt on which you’re being considered for DRS.
Since DRS is not the same as bankruptcy, it could do less damage to your credit health. However, it will depend on whether you manage to secure a Certificate of Completion from your Official Assignee or not. If you can stick to the plan and settle the dues, it could be seen as a positive development. Your future creditors may offer you good deals and treat you like a normal customer.
However, if bankruptcy charges are brought against you (once you’re found to be unsuitable for DRS), the trustee will determine the total number of monthly payments to be made to the estate for you to be declared undischarged.
If you’re a first-time bankrupt and you pay the target contribution and no creditor objects to it, you may be discharged within 3 to 5 years. If however, the court has to reject the creditors’ objections to the discharge, the discharge could take between 5 and 7 years. In either case, your name may be removed from the public records after 5 years from the date of discharge.
If you don’t pay the target contribution in full and the court rejects the creditors’ objections to the discharge, the discharge could happen after 7 years. Your name would remain on the public records permanently.
If you’re an undischarged bankrupt or if your name appears permanently on public records, you may find it extremely difficult to borrow in the future. Your credit score will also reflect that.
That is why it is important that you make every effort to avoid bankruptcy. A DCP, DMP, or DRS arrangement could be your last resort to bring your finances back on track. Temporary austerity is a small price to pay compared to all the restrictions that you’ll have to deal with, if you were to be declared a bankrupt. Start managing your finances today if you want to avoid complications tomorrow.