Debt Management Plans

Debt Management Plans -  Guide Chapter 4

Debt consolidation plus interest relief.

A debt management plan is not a new loan. Instead, a credit counsellor negotiates a repayment plan with your creditors on your behalf.

It is a form of debt consolidation because you still convert several outstanding unsecured debts, such as credit cards, cell phone bills and bank loans, into one single payment plan.

Financially, a debt management program has two significant advantages over a traditional debt consolidation loan:

  • It works for individuals who have bad credit.
  • It can provide savings in the form of interest relief.

Building a Repayment Plan

After meeting with a credit counsellor, they will put together a payment plan for you that, if you stick to it, will eliminate your debt within five years. This usually includes an interest freeze or reduction.

red flag: ability to payKeep in mind that you do have to be able to repay your debts in full within five years.

Once the agreement is in place, you begin to make monthly payments to your credit counsellor, who will in turn, remit agreed upon payments to your creditors. Once you are done, you have paid all your debts in full.

Your credit counsellor will also provide advice about personal finances and help you budget your money while you are participating in a debt management plan; giving you the tools to manage your money wisely for the rest of your life.

Debt management plans don’t necessarily include all of your creditors. If you are having trouble with three or four debts, but want to exclude others, working with a credit counsellor to come up with a repayment plan for the troublesome debts can be a good idea.

red flag: include all debtsBe careful that you don’t leave so many debts out that you really are not solving your financial situation permanently.

It’s also important to note that creditors don’t have to participate and that not all debts are eligible. In particular, a debt management plan does not apply to tax debts and not all payday loan companies or private lenders (family and friends) will participate.


Let’s look at our case study again.

Jasmine owes $20,000 in credit card debt, but she is only managing to pay $420 each month, and even this is a struggle.

credit card debt

Using a debt management plan, the credit counsellor might be able to arrange a monthly payment of $333. This would allow Jasmine to repay her debts within the limit of five years.

case study debt management plan savings

Now let’s look at how that option stacks up against Jasmine’s debt consolidation goals:

consolidation with DMP

We can see that in this scenario, all of Jasmine’s debt consolidation options have been met. She saved interest, has only one monthly payment and is paying less than she was before – and less than required with a debt consolidation loan – and her debt is paid in full within five years.

Summarizing the Pros and Cons

Debt Management Plans – The Advantages:

  • In many cases, your creditors will agree to waive at least some interest or all of the interest.
  • You’ll be making only one payment a month, which will help you budget your finances.
  • A debt management plan lends itself to credit card debt, some payday loans and loans from banks and finance companies.
  • You won’t have to deal directly with your creditors. Instead, whoever you choose as your credit counsellor will negotiate for you.

Debt Management Plans – The Disadvantages:

  • Debt management plans aren’t legally binding, which means your creditors can opt out of the plan at any time.
  • Your wages can still be garnished.
  • Collection agencies can continue to bother you for debts not included in your program.
  • It will affect your credit report. A notice will appear on your credit report that you have entered into a debt management program and it will remain for two to three years after your payments are completed.
  • You must be able to repay your debts in full within five years.

Should You Choose A Debt Management Plan?

A debt management plan might be the right option for you if:

  • your credit rating keeps you from qualifying for a debt consolidation loan;
  • you owe $10,000 or less;
  • you have only a few unsecured creditors; and
  • you can afford to pay your debts but need some time to do so without the financial burden of additional interest costs.

Assuming you can keep up with the payments and it deals with all your debts, a debt management plan might be your best option. However, if you can pay only a part of the money you owe, or your creditors are threatening legal action, you may want to consider a consumer proposal instead.

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