Debt Consolidation Plan: Things to Know Before Signing Up

Do you have too many credit card bills which are simply piling up on top of one another? Are you looking for a way to better manage the never-ending credit card payments that you have to make to multiple banks?

If yes, read on to learn about the Debt Consolidation Plan (DCP) in Singapore, which might help you to take control of your finances and plan towards resolving your outstanding debts.

This article will cover:

• How can a Debt Consolidation Plan help borrowers clear their debts?
• How does a Debt Consolidation Plan work?
• Who can qualify for a Debt Consolidation Plan in Singapore?
• How to apply for a Debt Consolidation Plan in Singapore
• What happens when your Debt Consolidation Plan application gets approved?
• What happens if you fail to pay off the Debt Consolidation Plan amount?
• How is a Debt Consolidation Plan different from the Repayment Assistance Scheme and the Debt Repayment Scheme?

How can a Debt Consolidation Plan Help Borrowers Clear Their Debts?

A DCP is a form of debt refinancing programme which allows a borrower to combine all his unsecured credit balances, owed to various financial institutions, into one single debt being owed to one financial institution.

The DCP was launched in 2017 to assist borrowers in discharging their debts, especially those that have multiple unsecured facilities or balances to multiple banks. It is a commercial product offered by banks to assist individuals in managing their debt obligations.

How Does a Debt Consolidation Plan Work? 

Consider the following scenario; you owe monies from your credit card spending to three banks: Bank A, Bank B and Bank C.  Also, assume that these loans are unsecured loans – loans which are not backed by any assets you owe and have been granted to you based on your creditworthiness.

You need to make monthly payments to discharge your debt to these banks, which may offer different interest rates for each type of loan. The deadlines for your monthly payments may also differ from bank to bank. Additionally, these banks may also impose different penalties for making late payments.

You may run into financial difficulties when you are trying to discharge your debt obligations to Bank A, only to realise that you may not have enough funds to cover your payments to Banks B and C as well.

This is where a DCP comes in the picture. Entering into a DCP would allow you to consolidate all your unsecured loans across all the financial institutions so you have to deal with only one financial institution.

Assume that you enter into a DCP with Bank A. Bank A will grant a loan amount – also referred to as the “DCP amount” – equivalent to the total outstanding loan you have (including any interest payments) that you may own to all the banks, plus an additional 5% allowance over and above the total outstanding balance.

The DCP amount will be directly disbursed to discharge your debt obligations to Banks B and C, and your existing credit accounts with these banks will either be suspended or closed.  Your obligations under the DCP will be discharged once you have paid back the monies that you owe under the DCP (inclusive of interest) to Bank A.

Types of loans not applicable for a DCP 

It is important to note that you cannot enter into a DCP for secured loans. Certain types of unsecured loans are also excluded from the DCP. These include:

• Loans from joint accounts;
• Renovation loans;
• Education loans;
• Medical loans; and
• Credit facilities granted for business purposes.

Who Can Qualify for a Debt Consolidation Plan in Singapore?

You can qualify for a DCP only if you are either a Singaporean or a Permanent Resident. Generally, you will be eligible for a DCP if you meet the following conditions: 

• You earn between $20,000 and $120,000 per annum;
• You have net personal assets of less than $2 million. Your net personal assets refer to the value of assets that belong to you, such as your property, personal investments and personal savings; and
• You have industry-wide unsecured debts exceeding 12 times of your monthly income.

Since the DCP is essentially a commercial product offered by financial institutions, these institutions may impose additional or slightly different eligibility criteria to participate in their version of the DCP scheme.

For example, some institutions may offer you a DCP only if you earn a minimum amount of $30,000 per annum, whereas others may require you to be at least 25 years to apply for a DCP. You are thus strongly advised to check with the respective participating financial institutions on the eligibility criteria to apply for their DCP.

 You can apply for a DCP with major financial institutions which provide unsecured credit facilities and/or credit card loans, such as POSB, HL Bank and Citibank. You can approach any one of these financial institutions to apply for a DCP, even if you are not an existing customer of them.

Do take note that key DCP terms, such as interest rate and repayment periods will vary across the different financial institutions, and it is up to you to determine which bank you would want to approach in order to execute a DCP. Some financial institutions may even offer promotional interest rates or complimentary insurance that can assist you to save money. 

However, you can have only one financial institution administer your DCP at any one point in time. This is consistent with the objective of the DCP, which is to assist you in consolidating all your loans with a single bank so that it will be easier for you to facilitate your loan repayments. Therefore, you also cannot partially split your DCP in a manner as to make payments to different financial institutions.

How to Apply for a Debt Consolidation Plan in Singapore

First, approach the financial institution of your choice to apply for a DCP. The financial institution will also be able to advise on its DCP application procedure.

Although the exact application procedure might vary from one financial institution to another, you may be required to prepare the following documents to apply for a DCP:

• If you are a Singaporean, a copy of your NRIC (front and back). If you are a Permanent Resident, a copy of your NRIC (front and back) and a copy of your passport would also be required;
• The latest copy of your credit report. You can obtain this copy by accessing the Credit Bureau of Singapore website.
• Your latest income documents, such as a computerised payslip, income tax notice of assessment, and latest 12 months’ CPF contribution history statement if you are a salaried employee; or latest 2 years’ income tax Notice of Assessment if you are self-employed;
• A  copy of your latest statements from your credit cards and unsecured credit facilities from banks you have taken loans from; and
• Confirmation letter stating unbilled principal balances for unsecured credit instalment plans (if any).

What Happens When Your Debt Consolidation Plan Application Gets Approved? 

Granting of the DCP loan amount

Once your DCP is approved, you will be given a DCP Ioan by the financial institution.

If you are applying for a DCP for the first time, the amount disbursed will normally be equivalent to the total outstanding balance (including interest and any other fees on your statemented accounts) plus an additional 5% allowance over and above your total DCP amount.

This 5% allowance is mandatorily imposed for your first approved DCP loan to help you tide over any incidental charges that may be incurred from the time the DCP loan is approved, to when the amount is disbursed to the respective financial institutions.

In addition, financial institutions which offer the DCP have the discretion to grant you a DCP amount which may be insufficient to repay all your outstanding debts on your existing unsecured credit facilities. In such a scenario, you will remain responsible for settling the shortfall directly with the financial institutions concerned.

Repayment of the DCP loan amount

You will be required to make monthly payments to the financial institution in accordance with the terms of the DCP you have agreed to.

The loan tenure of your DCP – meaning the length of time you will be required to make monthly payments to the financial institution – will depend on the discretion of the financial institution you have obtained a DCP from.

Some financial institutions offer a loan tenure of up to 10 years, whereas others offer a loan tenure of up to 8 years.

Closure of your existing unsecured facilities

If your DCP is approved by the financial institution, all your existing unsecured facilities will be closed. You will not be allowed to utilise these facilities until you have discharged your loan under the DCP.

In addition, you will not be able to apply for any new unsecured credit facilities unless your balance- to-income ratio (BTI ratio) falls below:

• 8 times if you are applying for a new unsecured credit facility with a financial institution that is not administering your DCP; or
• 4 times if you are applying for a new unsecured credit facility with a financial institution that is administering your DCP.

Your BTI ratio is calculated by taking your total unsecured loans (including interest) across all banks divided by your monthly income.

Granting of one revolving credit facility

In addition, you will be granted one revolving credit facility to help regulate your monthly bills. You are not required to use it if you do not feel it is necessary to do so.

A revolving credit facility is a form of loan the bank extends to you which does not have a fixed-term.

For example, assume you have a credit limit of $10,000 and you borrow $10,000 from a bank. If the loan is a fixed-term loan, you would be given a payment schedule to repay your debt obligations to the bank, along with the necessary interest.

In contrast, under a revolving credit facility, you will be able to continuously borrow monies and repay your debts, up to the limit of your credit line. So if you have already borrowed $5,000 from your credit line, you will be allowed to borrow up to another $5,000 while you are making your repayments.

Option of refinancing your DCP loan

You can also choose to refinance your existing DCP loan by entering into a new DCP arrangement with another participating financial institution.

Say for example, you entered into a DCP arrangement with Bank A with $150,000 worth of debt and incur an effective interest rate of 7% for this loan. However, you later realise that that Bank D actually gives you an effective interest rate of only 5% and therefore the repayment amount which would be lower than what you would have to pay Bank A.

In this case, you can choose to terminate your DCP with Bank A, and refinance your existing DCP loan by entering into a new DCP arrangement with Bank D.  Bank D may then grant you a DCP amount that is capped at your total outstanding balance.

Take note that while you can refinance your DCP loan with another participating bank, you can do so only after at least 3 months have passed since the approval of your first DCP loan. You will also have to bear any early termination fees for cancelling your DCP with the previous bank.

What Happens If You Fail to Pay Off the Debt Consolidation Plan Amount? 

The DCP will include terms which will cover scenarios where you are unable to make a payment.

For example, if you miss a monthly payment, you may be charged a late payment fee and additional interest, in accordance with the terms of the DCP you have entered into.

This is not dissimilar to what happens when you miss paying a bill for credit card debt. However, if you default on your monthly DCP payments, you will not be able to obtain any other credit facility from other banks to assist you with these payments.

Additionally, your financial institution may also have the discretion to terminate the DCP if it forms the view that you are no longer capable of sustaining your monthly payment obligations under the DCP.

In such a situation, the full amount of payment required under the DCP may become due and payable immediately. Your financial institution may also commence legal proceedings to enforce the payment of the debt under the DCP.

How is a Debt Consolidation Plan Different From the Repayment Assistance Scheme and the Debt Repayment Scheme? 

A DCP is different from the Repayment Assistance Scheme (RAS) and the Debt Repayment Scheme (DRS).

Repayment Assistance Scheme (RAS)

The RAS is a form of centralised repayment scheme which is administered by Credit Counselling Singapore, and primarily assists individuals who have accumulated debt in excess of 12 times their monthly incomes.  

It should be noted that applications for RAS schemes have closed on December 31st 2015  and fresh applications to make payments under the RAS will no longer be accepted.

However, if you are already under the RAS, it might be worthwhile for you to consider whether you would want to transfer your obligations to a DCP scheme (explained below).

Under a RAS, the debt is divided into two portions:

1. Debt amounts up to 12 times an individual’s monthly income; and
2. Amounts which are excess of 12 times his income.

For the first portion of his debt, the individual is still required to make payments to the respective financial institutions, based on their respective due dates and interest rates.

It is only for the second portion of the debt where the debt amounts are consolidated and transferred to a RAS account under Credit Counselling Singapore, and the amount of interest that the individual has to pay for this portion is fixed at 5% per annum. 

In such a situation, you may find it more advantageous to enter into a DCP as opposed to staying on the RAS. By consolidating all your debts and having them administered by a single financial institution, you avoid having to juggle various payment dates or differing interest rates in order to calculate how much money he needs to pay for each month.

Conversely, staying on the RAS may be better suited for you if financial institutions are charging higher interest rates for their DCP schemes, as compared to the interest rates you would have to pay under the RAS.

Ultimately, you should calculate the amount of monies you have to pay under a DCP scheme or a RAS scheme in order to determine which will prove to be the better debt settlement plan for you.

Debt Repayment Scheme (DRS)

The DRS is a pre-bankruptcy scheme which can only be administered by an officer of the court from the Ministry of Law’s Insolvency Office, otherwise known as the Official Assignee (OA).

The DRS involves the debtor working out a suitable repayment schedule with the OA and repaying his debts to the unsecured creditors. During the time the DRS is in force, unsecured creditors cannot commence any legal action against the debtor unless given permission by the court.

Unlike a DCP or an RAS scheme, you cannot directly sign up for DRS. This is because the OA only gets involved when a bankruptcy application is made, either by yourself or against you by your creditor.

Once such proceedings are commenced, the OA will then assess your suitability to enter into a DRS. Furthermore, there are additional conditions which must be satisfied for a person to be eligible for a DRS (and which do not apply to a DCP):

• The total amount of unsecured debts cannot exceed more than $100,000 (now $250,000 till October 2020 owing to COVID-19); and
• The obligation to repay the debts cannot exceed a term of more than 5 years.

You can read more about the Debt Repayment Scheme in our other article.

By helping to consolidate all your debts with one financial institution, the DCP is a useful tool to help manage your unsecured debts and ensure that you do not face mounting interest charges for them.

Furthermore, the provision of revolving credit facility also provides you with some flexibility in being able to draw additional credit in situations where you may need the additional monies.

That said, if applying for a DCP is not able to assist you in managing your debt obligations, you may want to consider filing for bankruptcy instead. This is especially the case if you think there is a low likelihood of being able to pay your debts in full, or are unable to enter into private arrangements with your creditors to repay your debts.

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If you need legal advice on whether you should file for bankruptcy, feel free to consult one of our bankruptcy lawyers. They would be able to advise you on whether you should consider declaring yourself bankrupt, and the implications of being declared one.