Debt is a serious matter that can quickly become suffocating for many Canadians. Once you fall behind on your monthly payments, it may feel impossible to get out of debt. But it’s not all doom and gloom; there are solutions that can help you move forward.
Debt management plans and debt settlement are two of the most common debt solutions for Canadians struggling with debt. Both these options offer help when you are dealing with overwhelming debt, but they both come with advantages and disadvantages.
This guide compares the pros and cons of going for a debt management plan through a credit counsellor or with a debt settlement by working with a Licensed Insolvency Trustee.
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Debt management plans
A debt management plan, also called DMP for short, is an assisted repayment plan intended mostly for credit card debt and overdue bills. You enroll in a debt management plan with a credit counselling agency. A credit counsellor will review your budget and set up a monthly payment schedule to help you catch up on payment arrears and repay all your debts.
A debt management plan is also called a debt consolidation plan, but it is not a debt consolidation loan. You do not get a new loan to pay off existing creditors. Instead, you make one single monthly payment to the credit counselling agency who distributes your payments to the creditors included in your program until your debt is paid off.
A credit counselling agency can help you negotiate to reduce interest charges, but they can’t settle your debt for less than you owe.
Unlike in the case of debt management plans, opting for a debt settlement solution means that you won’t have to pay off all the money you owe, and your monthly payments are also likely to be much lower than in the case of a debt management plan.
Debt settlement is the route of choice for people who cannot afford to pay their debts in full. They need a company to negotiate on their behalf with creditors to pay less than they owe but what they can afford.
There are two main ways to get debt relief through debt settlement in Canada. You can go through a for-profit agency or opt for a consumer proposal.
In general, we recommend avoiding for-profit debt settlement companies. Their success rate is less than 10%, and a majority of their clients pay fees and leave before ever settling with creditors. Fees can run several thousands of dollars on top of any settlement agreement, and with such a high failure rate, for-profit agencies can leave you worse off financially than when you started.
A consumer proposal is a debt settlement program filed with a Licensed Insolvency Trustee. Most creditors prefer to settle debts through a consumer proposal. Proposals are an increasingly popular route for debtors to deal with debt and avoid bankruptcy.
Debt settlement through a Licensed Insolvency Trustee is typically a good option for consumers who have a sizeable amount of unsecured debt that isn’t backed by any collateral. Debt proposal settlements work for debts like credit card bills, payday loans, even government debts like taxes and student loans, but does not work for secured debts like your mortgage or car loan.
Essential similarities and differences
Both options allow you to avoid bankruptcy, but the outcomes are different.
Debt management plans are a suitable solution for consumers who can afford to repay their debts but need help organizing them in a single monthly payment. On the other hand, debt settlement is a solution designed to forgive or erase some of the debt because the debtor cannot pay back everything they owe.
A debt management plan is more costly. You are required to repay 100% of what you owe plus a 10% fee to the credit counselling agency. When you settle debts through a Licensed Insolvency Trustee, you pay a percentage of what you owe – usually as low as 35% of your total debt, but the actual amount depends on your financial situation. There are no additional fees when you work with a trustee.
Both deal with unsecured debt, although a Licensed Insolvency Trustee can settle a broader range of debts than can be dealt with through a debt management plan. If you owe money to a variety of creditors, a debt management plan is not a good option because DMP programs are voluntary; creditors can’t be forced to participate. Credit counselling agencies are not allowed to deal with the government on behalf of individuals, so if you owe a tax debt, you can’t rely on a DMP. Most payday loan companies won’t work with credit counselling agencies, and a debt management plan can’t deal with more complicated debts like Court-ordered judgments.
Both programs will leave a similar mark on your credit report.
Both a credit counsellor and Licensed Insolvency Trustee provide solutions when you can no longer pay back debt on your own. There are some common advantages to working with an accredited professional when looking for debt help:
- You make a single monthly payment, which is easier to manage
- Both can stop collection calls from creditors enrolled in the program
- Debts included in the plan will be gone when you finish the plan
- You get ongoing budget counselling and financial repair advice no matter which program you choose
Disadvantages of a debt management plan
There is no one-size-fits-all solution when choosing a way out of debt. A debt management plan will not work for everyone as there are some disadvantages of a DMP over debt settlement:
- Your debts will not be written off and must be repaid in full
- Creditors can’t be compelled to participate, and they may still contact you asking for immediate payment
- While you can pick and choose debts to include, it can still leave you with troublesome debts if you leave a creditor out or they won’t participate
- If you have a lot of debt, payments can still be expensive because you must pay back all your debts, plus a fee.
Drawbacks of debt settlement
While a consumer proposal allows you to repay your debts in less time and avoid bankruptcy, it’s not for everyone.
- You are required to include all unsecured debt in a consumer proposal; you can’t leave any creditors out.
- You will be required to surrender your credit cards, although you may be able to qualify for a new secured credit card shortly after starting the program.
- You must be insolvent to file. This means you can’t afford to repay your debts on your own or don’t have enough assets, like equity in your home, to refinance.
What happens to your credit report?
Both a debt management plan and consumer proposal are considered programs that help people who cannot repay their debts on their own. Both programs will affect your credit.
No matter which program you choose, a note will appear in the public records section of your credit report, and the debts included in your program will receive an R7 rating.
There are minor differences in how a consumer proposal and DMP affect your report, but generally, both are removed from your credit report 2-3 years from the date of completion or six years from the date of filing, whichever is first.
Working with a Licensed Insolvency Trustee
To submit a consumer proposal to your creditors, you need to contact a Licensed Insolvency Trustee and complete a legally binding process. The trustee will assess your financial situation and develop a proposal, which is essentially an offer to pay a percentage of your debts to your creditors.
No payments or fees are required until the proposal is filed with the government, and you receive full protection from the creditors. Once filed, your trustee can stop a wage garnishment and will notify your creditors so they stop calling you.
Consumer proposals have terms that cannot exceed five years. You make the payments through the trustee, who pays the creditors on your behalf. Unlike in the case of bankruptcy, you won’t have to surrender your assets, and you won’t be asked to report your monthly income and expenses.
There are advantages of settling debt through a Licensed Insolvency Trustee.
- Avoid bankruptcy
- Get relief from overwhelming debts
- Repay your debts in less time
- Get creditor protection
Both debt management plans and debt settlement via a Licensed Insolvency Trustee can help you deal with debt.
If you have the necessary income to continue to pay your debts, a debt management plan might be the right option for you. However, if you’re looking for debt relief because you can’t pay back everything you own, talk with a Licensed Insolvency Trustee about how a consumer proposal can improve your financial situation.
- Debt Settlement: Which Option Lets You Rebuild Your Credit Faster?
- Credit Counselling vs Consumer Proposal – Which Should You Choose?
- Debt Management Plan or Debt Consolidation Loan. Which Makes More Sense?
- Creditor Protection: Consumer Proposal vs. Debt Management Plan
- Credit Counselling & Debt Management Plans. Right Solution?