A debt management plan (DMP) is an arrangement set up by a credit counselling agency. The agency asks your creditors to reduce or stop charging interest, and you make one monthly payment to the agency, which passes it on to your creditors. Unlike a consumer proposal, you usually repay 100% of what you owe. Unlike a consolidation loan, you don't need good credit to qualify, because you aren't borrowing anything new.
The essentials
- What it covers: unsecured debt, such as credit cards, personal loans and some lines of credit
- What it doesn't: mortgages, car loans and other secured debts
- You repay: usually the full balance, often with interest reduced or eliminated
- Typical length: up to about five years
- Credit report: noted on your file, and removed 2 years after the debts are paid off
How it works
- Free consultation. A counsellor reviews your income, expenses and debts, and explains all your options, not just a DMP.
- Proposal to creditors. If a DMP fits, the agency contacts your creditors with a repayment plan.
- One payment. Once creditors agree, you pay the agency monthly and it distributes the money.
- Cards closed. Accounts in the plan are usually closed, so you can't add to the debt.
Creditors aren't legally required to accept a DMP, and some may decline. That's a key difference from a consumer proposal, which binds all unsecured creditors once the required majority votes in favour.
What it costs
Many credit counselling agencies are non-profits and offer the first consultation free. Running a plan usually involves fees, which may include a setup fee and a monthly administration fee, and they vary by agency and province. Ask for every fee in writing and compare them with the interest the plan saves you.
Non-profit isn't the same as free. And "credit counselling" isn't a protected term. Check the agency's credentials, its fees, and whether it's a member of a recognised industry association before signing.
Effect on your credit
A DMP is noted on your credit report. Accounts in the plan may show a rating indicating you're paying through a debt management arrangement, and the notation stays until two years after you finish repaying. Your score may drop at first, but completing the plan and paying on time rebuilds it, and the impact is generally lighter than a consumer proposal or bankruptcy.
Is it right for you?
A DMP tends to suit people who:
- Have steady income and could repay their debts if interest weren't piling up
- Can't qualify for a consolidation loan at a rate that helps
- Want to avoid a legal insolvency process
If even interest-free payments aren't affordable, a consumer proposal may be more realistic, since it can reduce the amount you repay.
Choosing an agency
- Look for a non-profit with accredited counsellors
- Expect a full budget review and an explanation of all options
- Avoid anyone pressuring you to sign on the first call, or charging large upfront fees
- Check with your provincial consumer protection office if unsure
Frequently asked questions
Do you pay back all your debt in a debt management plan?
Usually, yes. A DMP typically requires repaying 100% of the principal, though creditors may reduce or eliminate interest.
How long does a DMP stay on your credit report?
Until two years after you've fully repaid the debts in the plan.
Can creditors refuse a debt management plan?
Yes. Participation is voluntary for creditors, and some may decline.
Is credit counselling free in Canada?
Initial consultations with non-profit agencies are usually free. Debt management plans usually carry setup and monthly fees.
Sources
- Financial Consumer Agency of Canada, Getting help from a credit counsellor
- Financial Consumer Agency of Canada, How long information stays on your credit report