What are the Disadvantages of Debt Repayment Schemes?

While touted as a final lifeline, going on a Debt Repayment Scheme (DRS) has its drawbacks. Here’s why DRS may not be suitable, and a better alternative to consider.

The Debt Repayment Scheme (DRS) is a pre-bankruptcy programme administered by the Ministry of Law’s Insolvency Office. It serves as a final lifeline before actual bankruptcy, and offers protection against further debt recovery actions.

Unlike its peers, the DRS is not open for application. Instead, it is offered on a case-by-case basis to those who have already filed for bankruptcy. If deemed eligible, you will be offered the option to take up DRS. 

But what happens if you’re found ineligible for DRS? As you can imagine, there are some pretty serious implications at play here. Besides, this isn’t the only disadvantage the Debt Repayment Scheme could pose. 

Table of contents

• Understanding the Debt Repayment Scheme (DRS)
• Disadvantages of Debt Repayment Scheme
• Debt Consolidation Plan (DCP) - A Better Alternative?
• DRS vs DCP - How do They Compare?
• Debt Consolidation - Do It Yourself Version  

Understanding the Debt Repayment Scheme

But before we get ahead of ourselves, let’s first understand how the DRS works in Singapore. 

If granted, the DRS puts you under a five-year debt repayment period. During this period, you will have to surrender control of your financial affairs to the Official Assignee (OA), a representative from the Ministry of Law tasked to help you manage your affairs. 

Under the DRS, the OA will determine how much debt payments you have to make each month. This amount will depend on your income, as well as how much you owe to creditors. 

Make no mistake. The purpose of such an arrangement is to ensure you repay as much of your debts as possible, which means it’s likely that your finances will be very tight for the duration. 

You can certainly forget about big-ticket discretionary spending like taking long holidays, buying a new car, or renovating your home for the time being. 

Still, DRS is a better option than bankruptcy, which comes with even more restrictions – and perhaps worse, significant social stigma.

Disadvantages of Debt Repayment Scheme (DRS)

Ok, now we’ve come to the crux of this article: The disadvantages of the Debt Repayment Scheme, which may not be glaringly obvious at first glance. 

DRS cuts it too close to bankruptcy 

Firstly and most alarmingly, the Debt Repayment Scheme comes very close to bankruptcy. As explained above, you cannot apply for the DRS directly. Instead, you must wait to be considered for it – while already having filed for bankruptcy!

This means that if you’re deemed not eligible for DRS, the authorities will go ahead with your bankruptcy application. Therefore, those who are not ready to be declared bankrupt should not be considering DRS as the solution, as failing to qualify would mean bankruptcy.

DRS requires giving up control of your finances 

As noted above, if you’re eligible for DRS, you’ll be assigned an OA who will essentially take over all your finances for the duration. You’ll have very little say over your finances. From your income, you’ll be assigned a sum for you and your family’s needs (at the discretion of the OA, mind you), with the rest going to your creditors. 

Initially, having your financial autonomy taken away may offer a sense of relief for those who’ve been struggling to manage their affairs. Eventually, this loss of control over an essential aspect of your life can start to feel restrictive. Still, you’ll have no choice but to stick it out, which brings us to our next point. 

DRS lasts for five years 

When you’re put on DRS, you’ll need to prepare to be in for the long run. That’s because DRS is structured to last for five years, during which the OA will attempt to pay off your debts to the fullest extent possible. 

Five years is a long time to be stuck off paying debt, especially if you have to put aside all other needs and goals while you’re at it. 

Moreso when you consider that there are other methods of managing your debt obligations that could take a shorter duration. 

Debt Consolidation Plan – a Better Alternative to DRS?

So it turns out that DRS is actually a rather dire, last-chance-before-bankruptcy, kinda option. What if you have high levels of debt that are proving difficult to clear, but aren’t quite ready to risk being declared bankrupt if you fail to qualify for DRS?

In that case, you might consider looking into a Debt Consolidation Plan.

What’s a Debt Consolidation Plan (DCP) and how does it work?

In a nutshell, a DCP is another option for those saddled with overwhelming debt that is exceeding your ability to pay off. 

It works by consolidating all your unsecured debt (such as credit card balances, personal loans, etc) into a single debt that has a much lower interest rate. With a DCP, a larger portion of your monthly debt repayment goes towards your capital – this helps you to pay off your debt much faster than before. 

You may apply for a DCP at any participating bank in Singapore. Once granted, your bank will pay off your existing unsecured debt on your behalf. 

You can then simply focus on repaying your DCP with once monthly repayments, instead of having to juggle multiple payment due dates. 

Note that the interest on your DCP may vary according to which bank you choose. However, you can rest assured that DCPs will always have lower interest rates than unsecured credit facilities. 

Note that there are strict eligibility requirements when applying for a DCP, as follows:

• Have total unsecured debt more than 12x monthly income
• Earn between S$20,000 and below S$120,000 per annum with Net Personal Assets of less than S$2 million
• Be a Singapore Citizen or Permanent Resident;

DRS vs DCP – How do they compare?

The table above sums up the differences between DRS and DCP, but there are a few key factors to consider:

• DCP is overall more flexible, as you can choose a tenure up to 10 years. Importantly, this lets you determine your debt repayment each month; you can stretch out your tenure for lower monthly repayments, freeing up more of your cash flow.  In contrast, under DRS, the OA will determine how much you will pay each month. This means you and your family will have to make do with limited finances. 
• Under a DRS, all unsecured credit facilities will be suspended. Under a DCP, credit facilities will similarly be stopped, but you will be given a credit card with revolving credit equal to 1 month income. Again, this makes it easier to manage your cash flow. 

In essence, although both DSR and DCP are designed to help consumers get out from under heavy debt, DCP is the more “chill” option. 

Debt Consolidation – DIY version

What if you’re finding it challenging to pay off debt, but your liabilities aren’t heavy enough to require DCP or DRS? 

Well, you can still put the core principle of debt consolidation to work in do-it-yourself fashion. The key is to lower your interest rates overall using a personal loan, so that you can pay off your debt faster. Here’s how:

• Say you have three credit card balances totalling S$15,000. On average, the interest on credit cards is around 28% per annum.
• You find a personal loan with an interest rate of 2.68% per annum. This is a much lower interest rate than your credit cards.
• You apply for the personal loan for the sum of S$15,000, choosing a loan tenure that would result in a monthly repayment amount you can comfortably afford.
• Once approved, you use the personal loan to pay off all your credit card balances. 
• Now you simply have to focus on repaying your personal loan, making sure to meet the monthly repayment each time. 

See, it’s really not that difficult to consolidate your debts and make them easier to pay off. Get started by comparing the best personal loan offers now.