What is a Debt Management Plan?

How does a debt management plan work?

A debt management plan is a debt repayment schedule that you agree to with your creditors. When you enroll, you make a monthly payment to a credit counselling agency, which distributes the funds to your creditors. As a result, most creditors reduce or eliminate interest charges.

Bear in mind that this is an informal arrangement. It’s not a legal proceeding under the Bankruptcy and Insolvency Act. That means it’s flexible, but it also means your creditors aren’t legally required to accept it, and you have no legal protection from creditor action.

You repay everything you owe, with reduced or eliminated interest, usually within three to five years. During the program, you’ll pay fees to the credit counselling agency for administering the plan.

Some debts are not covered, such as student loans, tax debts, and secured loans like mortgages and car loans.

How do you enroll in a debt management plan?

The process starts with a free consultation with a credit counsellor. They review your income, expenses, and debts to determine whether this type of plan is a good fit. If you decide to proceed, they work out a monthly payment you can afford.

The agency contacts your creditors to ask them to accept the plan. Some agree to reduce or eliminate interest when they know you’re working with a non-profit credit counsellor. Some refuse, and you’ll need to arrange with them separately.

Once your creditors agree, you make one monthly payment to the credit counselling agency. The agency then splits it among your creditors according to the plan.

What debts can be included in a debt management plan?

A debt management plan covers unsecured debts. These are debts that aren’t backed by an asset the lender can take if you don’t pay.

Credit cards are the most common type of debt included. You can also include store cards, personal lines of credit, unsecured personal loans, overdrafts, and some medical bills.

What you can’t include matters just as much. The plan won’t cover your mortgage, car loan, or any other secured debt. It also won’t cover tax debt owed to the CRA, government student loans, or child support. Payday loan companies rarely participate either.

If these are your main debts, a debt management plan isn’t the right option.

How does a debt management plan affect your credit score?

Like most debt relief options, a debt management plan impacts your credit.

When you enroll in a debt management plan, your credit accounts are marked to reflect the arrangement. Revolving credit accounts, such as credit cards, receive an R7 rating, while installment accounts, such as loans, receive an I7 rating. The “7” signifies that you are making payments under a special agreement to settle your debts.

This rating is lower than those for on-time payments (R1 or I1), but it’s less severe than R9 or I9, which are given in cases of bankruptcy or when debts are sent to collections. You might find it hard to get new credit for a while.

Source: Equifax Canada – Consumer Credit Report User Guide

A record of a DMP remains on your credit report for two years after you complete the plan, or for six years from the start date, whichever comes first (as of January 2025).

Source: Equifax Canada – Dispute credit report (How long does information stay on my Equifax credit file?)

In my experience, the credit impact shouldn’t be the deciding factor. If you’re struggling with debt, your credit is likely already suffering from late payments and high balances. Getting the debt under control matters more than protecting a score that’s already taking hits.

What are the advantages of a debt management plan?

The interest relief is the main benefit. Most creditors will significantly reduce your interest rate or eliminate it entirely.

You also get simplicity, with one payment on one due date to one organization. The credit counselling agency handles creditor communication, so you receive fewer calls and letters to manage.

A debt management plan is flexible because it’s informal. If your income drops temporarily, the agency can often work with your creditors to adjust your payments. You can also pay it off early if your situation improves.

Unlike bankruptcy, you keep all your assets. Your RRSP, your car, and your home equity remain yours.

What are the disadvantages of a debt management plan?

You repay everything you owe. The plan reduces interest, not principal. If you owe $40,000, you’re paying back $40,000. Over five years, that’s still $667 a month before fees. For many people sitting across from me, that’s not affordable.

The arrangement isn’t legally binding. Your creditors agree voluntarily and can change their minds. If a creditor withdraws, you’re back to dealing with that creditor directly. Collection calls can continue unless creditors agree to stop them.

Tax debt, student loans, secured debts, and most payday loans cannot be included in a debt management plan. If these debts make up a significant portion of what you owe, this approach won’t solve your problem.

How does a debt management plan compare to a consumer proposal?

Both options help you manage debt, but they work very differently.

A credit counselling agency administers a debt management plan. A consumer proposal is filed through a Licensed Insolvency Trustee and is a legal proceeding under the Bankruptcy and Insolvency Act.

The big difference is debt reduction. With a debt management plan, you repay your debt in full. In a consumer proposal, you repay a percentage of what you owe, with the rest legally forgiven.

A consumer proposal also provides you with legal protection. Once filed, creditors must cease all collection actions, including wage garnishments. In a debt management plan, creditors participate voluntarily.

Both affect your credit in the same way. Both result in a 7 rating that stays on your report for a similar period.

Feature	Debt management plan	Consumer proposal
Administered by	Credit counselling agency	Licensed Insolvency Trustee
Legal status	Informal, voluntary	Government legislated and legally binding agreement under BIA
Debt reduction	None, repay 100%	Portion of debt forgiven
Legal protection	None	Yes, creditors must stop collection
Tax debt	Not included	Can be included

The choice comes down to affordability. A debt management plan is suitable if you can repay your debt in full at a lower interest rate. If actual debt reduction is needed, a consumer proposal is better.

Who should consider a debt management plan?

A debt management plan makes sense if you have a steady income, can repay your debt in full within three to five years, and owe mainly unsecured debt, such as credit card debt. It works best when you need help with interest charges and organization rather than debt reduction.

If you owe more than you can repay in five years, have significant tax debt, or face wage garnishment or legal action, a debt management plan likely isn’t right for you. Talk to a Licensed Insolvency Trustee about a consumer proposal.

Frequently asked questions

Can creditors refuse to participate in a DMP?

Yes. Participation is voluntary. Most major banks and credit card companies accept these arrangements, but some creditors refuse, particularly payday lenders. You’ll need to make separate arrangements for any creditors who don’t participate.

What fees are charged in a debt management plan?

Credit counselling agencies charge a setup fee and monthly administration fees. These fees vary by agency, but non-profit agencies aim to keep costs low. The fees are typically included in your monthly payment. Ask for the total cost in writing before you agree to anything.

Can I include tax debt in a debt management plan?

No. CRA won’t negotiate through a credit counselling agency. If you owe tax debt and need relief, you’ll need a consumer proposal.

What happens if I miss a payment?

Contact your credit counselling agency immediately. If you miss too many payments, your DMP may be cancelled, and your creditors will resume collection at the original interest rates.

Can a Licensed Insolvency Trustee set up a debt management plan?

Not exactly. Licensed Insolvency Trustees don’t administer debt management plan. We file consumer proposals and bankruptcies, but we will discuss the advantages and disadvantages of all available debt options, including a debt management plan, before you proceed with anything.

How long does a debt management plan take?

Most DMPs take three to five years. The exact length depends on how much you owe and how much you can afford to pay each month. You can pay it off early without penalty if your financial situation improves.

Get the right advice for your situation

The right solution depends on what you owe and what you can afford. A debt management plan works well for some people, while others need to reduce their debt to draw a line under it and move forward.

Our Licensed Insolvency Trustees offer free consultations to review your situation. Contact our office to book a no-obligation appointment. For help improving your financial situation, you can talk to a friendly debt expert for free today at 587-701-5681.