What is a Debt Management Plan
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Paying off high-interest-rate debt, like credit cards or loans, can be challenging, especially when you have high balances on multiple debts. If you’re having trouble getting out of debt on your own, a debt management plan may be the solution you need. In the right circumstances, it can make it much easier and faster to become debt-free. Let’s look at how the plan works and how you can decide if it’s the right choice for you.
What you’ll learn in this guide
- A debt management program (DMP) is a structured repayment plan that consolidates unsecured debts into one monthly payment.
- Credit counsellors negotiate with creditors to reduce interest rates and stop penalties, helping people pay off debt faster.
- The process starts with a free credit counselling session to review your finances and determine if a DMP is appropriate.
- Most DMPs are completed in 3 to 5 years, with no loan required and no minimum credit score.
- There will be an impact on your credit score when enrolling in a DMP; however, you will start to see improvements as your credit card balances decrease more quickly due to the reduced interest you are paying.
What is a debt management program?
A debt management program (DMP) helps you repay high-interest unsecured debts like credit cards and personal loans. This program aims to do this in an organized and systematic way.
A DMP is administered by a Credit Counsellor and works by combining multiple debts into a single affordable monthly payment and minimizing or eliminating interest. These payments are submitted to your Credit Counsellor, who then distributes them to your creditors. As a result, you can get out of debt in 60 payments or less and save money as you become debt-free.
A debt management plan is not to be confused with other debt relief solutions, such as debt settlement or debt consolidation. While all of them aim to help you pay off your debt, they each do so in very different ways.
What is a DMP?
Consolidated Credit Canada’s Executive Director, Jeff Schwartz explains.
What debts can I include?
A debt management plan consolidates most types of unsecured debt. Unsecured, unlike secured, debts don’t have any collateral, such as a home or property. Therefore, if you face financial difficulties, your creditors cannot seize your possessions to repay the loan. However, not repaying them can harm your credit score. A bad credit score can stop you from getting a job, renting an apartment, or buying a home.
The most common unsecured debts include:
- Credit cards
- Store credit cards and in-store credit lines
- Unsecured personal loans
- Personal lines of credit (LOCs)
- Debt collection accounts
- Short-term installment loans, such as payday loans
- Buy-now-pay-later debts
- Old utility or cell phone bills, not currently in use
You cannot include debts, such as:
- Secured debts (mortgage or car loan)
- Student loans
- Past due child support payments
- Debts owed to the Canada Revenue Agency (CRA)
How a debt management plan works
There are just 4 steps between you and a debt-free life. We have outlined them below to help you understand how debt management programs work.
Step 1: Contacting a counsellor
You contact a credit counselling organization to receive a free debt and budget evaluation from a trained credit counsellor.
After reviewing your debts, credit, and budget, the counsellor will help you decide if a debt management plan is the best fit for your situation. DMPs are used for unsecured debt, which means a loan or credit without any collateral. If most of your debt is unsecured, a DMP may likely be a good fit.
If so, the counsellor will work with you to find a monthly payment you can afford.
Step 2: Counsellor to the rescue
Then the counselling team will contact your creditors and work with them to reduce or eliminate the interest rates applied to your balances. You still owe the full amount you borrowed.
Once all your creditors agree, your plan will officially start.
Step 3: Debt-be-gone
You make one payment to the credit counselling service each month, and they distribute it to your creditors every month as agreed. They will help you get highly reduced interest rates, and you can also combine multiple debts into one payment.
As each credit card gets paid off, the account is closed.
Step 4: Enjoy!
With all your debts paid in full, you complete the program and can enjoy your debt-free life. You can also start rebuilding your credit at this point. A secured credit card can help. As you make payments in full and on time regularly, your credit will start to bounce back.
Debt management plan fees
Debt management plans do have fees that apply, but the cost is low compared to other solutions. There are two fees that you can expect when you enroll:
- A one-time setup fee
- A monthly administration fee
As a non-profit organization, Consolidated Credit does not charge clients to generate profits. These fees simply cover the administrative costs of overseeing your debt management plan.
Fees are based on the total debt you enroll in the plan and your budget. They are rolled into the monthly payments for your program, meaning you do not need to worry about an extra bill. You will not pay any monthly fees until your creditors agree to the terms of your debt management plan and you start to make payments.
The fees for a debt management plan are low compared to other solutions. With a debt settlement program, you pay a percentage of the original amount owed on each debt you settle. Consumer proposals have a filing fee of $1,500 plus 20 percent of all future payments under the proposal. Bankruptcy fees are even more than that.
During your free credit counselling session, before enrolling in a DMP, the credit counsellor will explain what fees to expect. You will know exactly what fees you’ll be paying and how much they are before starting the program.
Debt management plan pros and cons
The primary benefit of a debt management plan centres on the savings it provides. Minimizing interest makes it much easier to pay off your debt and much faster. Balances that would take years or even decades to pay off can be paid off in 60 payments or less, and your payments can be reduced by up to 30 to 50 percent. You also protect your assets from being sold to repay your debts, which will happen if you file for bankruptcy.
There are some downsides to a debt management plan. For example, it will be noted on your credit report that you are paying off your debt on an adjusted payment schedule. This notation remains for two years, much less time than other debt solutions, from the date you complete the program. You also cannot use the credit cards you enroll in the programs, as card issuers typically require that cards put into any debt relief program be closed.
Not suitable for all types of debt: Some forms of debt, such as student loans or child support debts, may not be eligible for inclusion in a debt management plan, limiting its effectiveness for certain individuals.
Pros and cons table
Here are some pros and cons with detailed information that can help you consider how a debt management program could work for you. This could help you see if a DMP is the right fit for your situation.
| Pros | Cons |
| Cannot use credit cards and cannot usually apply for new credit or loans while enrolled in the program. | Stop annoying collection phone calls or emails from your creditors while you are on the program – relief and peace of mind. |
| Become debt-free in 36-60 payments, on average. | Credit card accounts will be closed. |
| Make one affordable monthly payment for all your debt via a structured repayment plan, consolidating multiple debts into one payment. | DMPs can involve extended repayment periods that can go up to 5 years. |
| Provides you with financial education and tools to help you develop better money management skills. | Some creditors do not take part in any DMP. Depending on which creditors you’re with, this may limit the effectiveness of the program. |
| Stop annoying collection phone calls or emails from your creditors while you are on the program – relief and peace of mind | Though minimal, there are fees associated with doing a DMP. |
| Improves your credit score over time after successful completion, as it demonstrates responsible financial behaviour. | Noted in your credit report for two years from the date you complete the program. Enrolling in a DMP can also temporarily affect credit scores due to the necessary account closings or negotiated adjustments with creditors. |
Who do I turn to get a DMP?
If you aspire to be on an effective debt management program, contact a credit counselling agency.
It’s important to do in-depth research about the agency that you choose. Here are some crucial things to consider:
- How long has the agency been established?
- Does the agency have good reviews?
- How much does an agency charge for a DMP?
- Is the agency a non-profit?
- Are they listed on the Better Business Bureau? If so, what score do they have?
- Are they ranked by any other third-party sites, such as TrustPilot?
By finding out this information, you will be on your way to discovering the right organization for you.
Factors that could disqualify you from a debt management program
Several factors exist that can disqualify you from participating in a debt management program.
Your income may not be enough
Your income may be too low to help you keep up with DMP payments. Creditors will want to see that you will be able to afford the monthly payments and will pay them on time.
The type of debt you have is ineligible
DMPs are for unsecured debt like credit cards and payday loans. If your debt is mainly secured debt, such as a mortgage, student loan, or car loan, a DMP is not the debt solution for you.
Your creditors won’t negotiate
If your creditors won’t negotiate with the credit counselling agency, they won’t be able to include that debt in your program. This doesn’t happen often, as most creditors would rather receive something than risk getting nothing. As long as you are being transparent, realistic, and genuinely willing to work with them, they are likely to agree to the DMP.
You may be facing legal action
If you are being sued by a creditor or are facing legal action by any financial institution, you may not be eligible for a DMP.
What resources can I access while enrolled in a DMP?
Here are some tools and resources you may access while on a DMP. These resources will help you understand how this program can help you.
Budgeting Assistance
A DMP can guide you in creating and maintaining a budget to help you manage your finances effectively so that you can secure your financial future.
Credit Counselling
You can receive counselling sessions with credit counsellors who can offer personalized advice on managing your debts and improving your financial situation. The counsellor can take an in-depth look at your spending habits and the goals that you want to achieve, and answer any questions related to finances you may have.
Educational Resources
Many DMPs offer educational resources and tools to help you improve your financial literacy and make informed decisions about your finances. These tools may come in the form of eBooks, educational videos, or PDF handouts.
Support Network
Enrolling in a debt management program provides access to a network of professionals who can offer you guidance and encourage you throughout the debt repayment process.
The resources available to you may vary depending on the credit counselling agency you choose. We suggest doing thorough research on the agency you want to reach out to.
Talk to a trained credit counsellor now for a free debt and budget assessment so you can see if a debt management program is the right debt relief solution for you!
A debt management plan and your credit
Your credit score is highly important to improving your financial future. In Canada, if you have an excellent credit score of 760 and above, you will get better access to low-interest loans, and you will not have any problems getting a job that requires a security clearance. However, if you have a poor credit score, one that is 580 or below, you will have a harder time buying a home, getting an apartment to rent, or applying for student loans.
Impact on your credit score
It’s important to recognize that a debt management plan will have some negative impact on your credit. The program is noted on your credit report as soon as you start the program. It will stay on your report for two years from the date you complete the program. Any accounts you include in the program will have an R7 status notation, which shows that it is a revolving account being paid back on an adjusted schedule.
Closing credit cards
Closing credit card accounts may also impact your credit score, especially if you close old accounts. Creditors consider “credit age” when calculating your credit score, which is the average age of all your accounts combined. If you close old accounts, it can decrease your credit age, which can, in turn, decrease your score.
Closing cards also affects your credit utilization ratio. This ratio is calculated based on your total outstanding debt and your total credit limit. As you close cards, your total available credit limit will naturally decrease. This means your debt will be a relatively high percentage of your total credit limit for a period of time. For a healthy credit score, the recommended credit utilization ratio is a maximum of 30%. As you begin to pay off your debt, your score will also start to reflect an improvement over time.
Keep in mind, any decrease in your score will be temporary. You can also take steps to rebuild your credit once you get out of debt. What’s more, the credit report notations that result from a debt management plan are less severe than those of other debt relief solutions.
For example, a consumer proposal will also generate an R7 status for any account included in the proposal. However, the notation will remain for three years from the date your debt is discharged instead of two.
How severe is the impact of a DMP compared to other debt solutions?
The credit damage caused by solutions such as debt settlement and bankruptcy is even more severe. These types of notations remain for six years and have a significant negative impact on your credit score. So, while a debt management plan will negatively impact your credit, it helps you avoid greater damage.
Rebuilding my credit score after a debt management program
If you want to rebuild your credit after you have completed a DMP, there are certain things that you can do. You should focus on:
Paying your bills on time
Paying bills on time helps build credit. It shows that you are reliable. It also builds your reputation and proves that you manage your money wisely. When we discuss paying bills on time, we are speaking about all forms of bills, from your rent, hydro, utilities, phone bills, and credit card bills.
Timely bill payments boost your financial reputation. It is helpful when you apply for loans or credit cards in the future. Banks and credit card companies will see you as a low-risk borrower. This means you may be able to receive better interest rates and terms on future credit.
Credit utilization ratio
Keep your credit utilization ratio below 30%. Your credit utilization ratio is how much of your total credit limit is being actively used at once. Creditors see a credit utilization ratio below 30% as a positive sign that you’re managing your debts responsibly. While this may not be doable while doing a DMP, following this guideline can go a long way once you’ve completed the program.
Get a secured credit card
Secured credit cards can improve your credit score. To open an account, you must deposit cash as security. The spending limit of the card matches your deposit. For example, if you deposit $1000, you can spend up to $1000. The major difference between secured and unsecured credit cards is that the unsecured card requires a deposit. By making timely payments to unsecured cards, your score will gradually improve.
Become an authorized user
Becoming an authorized user of a credit card owned by someone with a high credit score can help improve your score. You wouldn’t need to actually use the card or even physically have the card. Just being authorized on their account can help.
Deciding if a debt management plan is the right solution for you
Like all debt solutions, a debt management plan is not for everyone. If you have the means to pay off your debt on your own, it’s recommended that you do so. That will help you avoid any negative notations on your credit report.
A debt management plan is meant to help Canadians who are having trouble getting out of debt on their own, but who are dedicated to paying off what they owe. Your credit counsellor will work with you to find a monthly payment you can afford.
If you’re still unsure, call to speak with a trained credit counsellor. The counsellor can review your budget and help you understand all the options you have for relief. Then they can help you identify the best solution for your needs. The counsellor will only recommend a debt management plan if it’s the right fit for your unique financial situation.
