Paying down high-interest debts like credit cards can be challenging and frustrating. Sometimes, it feels like you can never bring your balance to zero, especially if you can only afford to make minimum payments. The interest piles up fast, causing your debt to grow rather than shrink over time.
At some point, escaping this debt cycle becomes impossible without outside help. Some people turn to a debt relief service known as a debt management plan (DMP) to lower their payments and pay off their balance faster. Depending on the severity of your situation, this program may be a solid choice for addressing your debt problems.
Whether you’ve already considered signing up for a DMP or we’ve piqued your interest, let’s look at how this program works to see if it’s right for you.
What is a debt management plan?
A debt management plan (DMP) is a structured program that helps you pay down high-interest, unsecured debts, such as credit cards and installment loans. It involves working with a credit counsellor who combines your debts into one monthly payment and negotiates with your lenders to reduce or eliminate interest charges. As a result, you end up with a simplified and cheaper payment plan that fits your budget, helping you become debt-free sooner.
A DMP doesn’t involve taking out a loan. Therefore, you won’t find banks and other financial institutions offering this service. DMPs are available mainly through non-profit credit counselling agencies, organizations that provide people with tool and advice to better manage their finances.
A DMP is sometimes called a debt repayment program or debt management program. Regardless of the terminology, the goal is always the same: to help save you money by reducing your debt payments.
How does a debt management plan work?
So, how exactly does a debt management plan (DMP) work? Below, we’ve broken down the process into four steps to help you understand what you can expect.
Step 1: Set up an appointment with a credit counsellor
The first step is setting up an appointment with a local credit counselling agency. The organization will pair you up with one of their credit counsellors to review your financial situation: budget, debts, income, credit score, etc. They’ll also request information about your creditors and account statuses (current, behind, written-off, etc.) to see where you currently stand regarding your debts.
The goal of this consultation is to determine if a DMP is the right strategy for you. It usually takes an hour to complete. If you qualify, the credit counsellor will help you figure out a monthly debt payment you can afford.
So, what makes one a good candidate for a DMP? Each credit counselling agency has its distinct policy regarding who they accept. But in general, you need to meet the following criteria to enroll in the program:
- You’re committed to repaying everything you owe
- You have a reliable source of income
- Your debt payments are very high relative to your income, making it challenging to keep up with your living expenses.
- Your debts are composed primarily of unsecured loans
- You owe a significant amount of debt, typically at least $10,000
- A creditor is not suing you for unpaid debts
If you don’t qualify for a DMP, your credit counsellor may suggest an alternative solution, such as filing a consumer proposal.
Step 2: Debt negotiation with creditors
Once enrolled in a DMP, your credit counsellor will notify creditors that you’re participating in the program. They’ll present your monthly budget and use it to negotiate a reduction in your interest rate. Depending on the lender, they may convince them to eliminate your interest charges entirely, along with late fees. In addition, your payment schedule may be extended, giving you more time to pay off your balance.
This step can take a few weeks or months to complete. The time depends on how many creditors you have, how difficult it is to reach them, and how long it takes to complete negotiations.
Once your creditors agree to the new payment terms, your DMP officially begins.
Note: You cannot charge new purchases or payments to credit cards and lines of credit that are part of your DMP. You also cannot open any new accounts unless they’re for secured debts, such as auto loans and secured credit cards. These rules apply until you pay off all debts included in your DMP.
Step 3: Make debt payments to your credit counsellor
During your DMP, you’ll make one monthly payment to the credit counselling agency. The agency will then distribute the money to your creditors per the agreement’s terms.
You have a maximum of five years to pay off the unsecured debts that make up your DMP. If you wish, you can contribute extra payments to pay down your balance faster. The sooner you clear your debts, the sooner you can work on re-establishing your credit or focusing on other financial goals.
Step 4: Complete the program and become debt-free
As you progress with your DMP, your credit counsellor will provide resources and advice to bolster your money management skills. This includes helping you create a budget to cover your living expenses so you don’t need to borrow money to get by while in the program. Most credit counselling agencies offer helpful workshops, webinars, and online courses to get your finances back on track and avoid future debt issues.
Your accounts will be closed as you finish paying off the debt. Once the last dollar is paid, your DMP ends—and you’re officially free from those punishing high-interest loans!
What debts can you include?
A DMP covers unsecured debts, i.e., loans not backed by any asset, such as your home or car. Here are some examples of debts you can add to your DMP:
- General-purpose credit cards
- Department store credit cards and gas cards
- Unsecured personal loans
- Unsecured personal lines of credit
- Bank overdrafts
- In-store credit lines
- Debts in collections
- Unsecured debt consolidation loan
- Certain past-due bills
As long as the debt is unsecured and your creditor permits you to make payments through a DMP, it’s eligible for inclusion. On the other hand, secured debts don’t qualify for a DMP. So, you cannot include mortgages, home equity loans, home equity lines of credit (HELOC), or car loans.
Other debts excluded from a DMP are:
- Government student loans
- Child support payments
- Tax debt owed to the Canada Revenue Agency (CRA)
Payday loans are unsecured debts, so technically, they qualify for inclusion. However, most payday lenders feel uncomfortable participating in DMPs. If you have these types of loans, you may need to find an alternative way to deal with them. A consumer proposal can help reduce your payday loan debtif you cannot afford the payments.
Debt management plan fees
Generally, you can expect to pay two types of costs when signing up for a DMP: a setup fee and an administrative fee. Most credit counselling agencies base the amount you’ll pay on the total debt included in your plan and what you can afford. You don’t have these fees separately. Instead, the agency adds them to your monthly payment. Your credit counsellor will explain what fees you’ll be paying before you begin your DMP.
DMP fees are very reasonable compared to other options, such as hiring a private debt settlement company to negotiate with creditors on your behalf. However, if you still can’t afford them, ask your credit counsellor if they can waive the fees or give you a discounted rate.
The pros and cons of a debt management plan
As with every type of debt relief strategy, a debt management plan has pros and cons:
Pros
- Reduces or eliminates interest charges, which can save you a considerable amount of money
- Consolidates multiple debts into one affordable monthly payment
- Helps you get out of debt within a specific period, usually three to five years
- Provides you with financial guidance and educational resources from a trained credit counsellor
- Stops harassing collection calls from creditors while you complete the program
- You can sign up even if you have a massive amount of debt, such as $100,000
Cons:
- You’re still legally responsible to repay 100% of your debts
- Requires you to freeze your credit card and lines of credit accounts; you also cannot apply for new credit accounts during the program
- You can’t include secured debts under the program
- You must close your credit cards once you pay off your balance
- It can negatively impact your credit score for a time, which can make qualifying for a loan harder
- Your unsecured creditors are not obligated to participate in the program
- A DMP agreement isn’t legally binding on your creditors—they can bow out at any time and resume their collection tactics to get you to pay
How does a debt management plan affect your credit?
Participating in a DMP will hurt your credit score since you’re not repaying your loans as initially agreed with lenders. However, the impact is less severe than having an account sent to a collection agency or written off. That’s because you’re paying your debts in full—only with less or zero interest.
The credit bureaus will add a note to your credit report indicating your involvement with a DMP. It will remain on your report for two years after you pay off the debts included in the program. Credit cards, lines of credit, and other accounts part of your DMP will be marked with an R7 status code on your credit report. This notation indicates to lenders that you’re making payments under a negotiated agreement to pay off your debt.
Once you complete your DMP, you can focus on restoring your credit standing. With discipline and the right strategies, you can quickly boost your credit score.
What happens if you abandon your plan or can’t keep up with your payments?
A debt management plan is an entirely voluntary program. Neither you nor your creditors are legally obliged to participate. That means you’re free to opt out anytime for any reason. You won’t face any financial penalties or additional negative remarks on your credit report.
Remember that once you exit your DMP, creditors will likely reinstate your original interest rates and fees. They can also continue bombarding you with collection calls and sue you to recover what you owe.
H2: What to consider before enrolling in a debt management plan
Depending on your circumstances, a debt management plan may or may not be the fix that delivers financial relief. Here are some questions to ask yourself before committing to one:
- Can I afford to repay 100% of my debts?
- Do my debt affordability problems stem from mostly unsecured debts?
- Do I have the means to pay down my unsecured debts in five years?
- Can I afford to pay the fees charged by credit counselling agencies?
- Am I prepared to suffer a temporary decline in my credit score?
- Do I owe more than $10,000 in unsecured debts?
If you answered “yes” to most of these questions, a DMP could be a suitable solution to lowering your debt burden.
How a debt management plan compares to a consumer proposal
A consumer proposal is a federal debt relief program designed to help you reduce your unsecured debts. It combines the benefits of private debt settlement and a DMP. In other words, you get to negotiate with creditors to pay less than you owe. Depending on your situation, you likely will not need to repay 100% of your principal. In addition, all interest charges stop immediately!
Under a consumer proposal, you make a single affordable monthly payment, the same as a DMP. You have a maximum of five years to pay the total amount that you can afford to repay monthly, and the balance written off by the creditors..
A notable benefit of a consumer proposal is the legal protection you receive against creditors. Once your application is approved, you are immune to lawsuits, wage garnishments, etc. A consumer proposal also legally binds your creditors to your new payment terms—they cannot opt out at their discretion the way they can under a DMP.
Since you’re not repaying your debts in full, filing a consumer proposal will result in an R7 rating on your credit report, the same as a DMP. However, it’s removed three years after you complete the program. You can work on rebuilding your credit throughout your proposal, emerging financially stronger in little time.
In Canada, credit counselling agencies don’t offer consumer proposals. Only Licensed Insolvency Trustees have the authority to administer them.
How to find a credit counselling agency to work with
If you’re considering a debt management plan, sign up for one at an accredited, reputable credit counselling agency. These agencies should be members of provincial or national associations like the Credit Counselling Canada and the Canadian Association of Credit Counselling Services (CACCS). Membership in these associations indicates the agency adheres to a strict code of conduct and follows industry standards.
Start by scouting for non-profit agencies, as they offer more affordable DMPs. Read reviews and testimonials, and consider asking friends and family for recommendations. When you find an agency that looks promising, schedule an appointment to gauge the agency’s professionalism, transparency, and willingness to answer questions. Be sure to examine what other services they offer and ask if they offer tailored solutions. And, of course, get to know the fees they charge.
As with debt settlement companies, be cautious of agencies that offer quick fixes or guaranteed results. Always remember: A DMP is not a legally binding agreement with your creditors—they can refuse to deal with your credit counsellor anytime.
The bottom line on debt management plans in Canada
A debt management plan can be an excellent solution if unsecured debt payments consume too much of your income. Steep interest charges can quickly overwhelm your budget, leaving you with little to cover your living expenses. The interest relief a DMO offers may lower your debt payments enough for you to handle day-to-day bills while keeping your creditors happy.
However, a consumer proposal can lower your payments even more, eliminating all interest plus a sizable portion of your principal. If you need help determining the most suitable option, book a free consultation with one of our Licensed Insolvency Trustees. During this meeting, we’ll review your current financial picture and how much you owe your creditors. From there, we can help you determine the best path to get you out of debt for good.
