Credit counselling may also be referred to as a debt management plan (DMP). In Canada there is a network of not-for-profit entities that offer these services. Many are small, local charities. A couple are massive national corporations operating as charities. Regardless, a debt management program is designed to reduce or eliminate any new interest charges on your debt. You still repay the debt in full, but without any new interest your payments go directly to reducing the debt. The 10% administrative fee is built into your monthly payment.
This program is provided by companies (sometimes referred to as not-for-profit), who are, more often than not, supported by credit grantors (financial institutions). It is important to note that in addition to financial support from the credit grantors, a not-for-profit will also receive a monthly administrative fee as a part of your monthly payment The program requires 100% of debt repayment to creditors through monthly payments based on a what you owe as well as the monthly administrative fee. This option does not guarantee that creditor harassment will cease or that there will be no interest charged.
A credit counselling or a debt management plan is a voluntary agreement between you and your creditors. Creditors who choose not to work with you through a debt management plan may continue to contact you or garnish your wages or take money from your bank account if you have a bank account with them and you owe them money.
If some creditors don’t accept your debt payment plan, your credit counselling agency will usually suggest you make payment arrangements directly with those creditors. Keep in mind that creditors can still use collection agencies to recover the money you owe. Your credit counsellor can ask creditors to stop, but they have no legal power to make them stop.
Advantages of Credit Counselling
- May allow interest relief
- Typically 1-5 years in length and can be paid off early with no penalty
Disadvantages of Credit Counselling
- Counselling services can work with creditors to reduce the amount of interest will pay but debts are typically repaid in full
- Under this option it is likely that you will have to make higher monthly payments than under a Consumer Proposal
- There is no ability to ensure all of your creditors agree to the terms
- Creditors are not required to participate and some may not
- Negatively affects your credit and the record of credit counselling stays on your credit report for 3 years after you’ve completed your payments (the same as a consumer proposal)
Why a Consumer Proposal may be a better option
You may be better off filing a consumer proposal than a debt management plan for a number of reasons:
- The impact on your credit report is the same for a debt management plan and a consumer proposal
- A debt management plan usually has no interest charges going forward – a consumer proposal never does
- In a consumer proposal you repay a portion of what you owe – in a debt management plan you repay the entire debt
- The most common amount repaid in a consumer proposal is about 1/3 of your debt, but it varies depending on your circumstances
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