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When your expenses start to outweigh your savings, you can try working extra hours, borrowing money, or finding a side hustle to help cover your costs. Then again, if your debts increase exponentially, you may be forced to consider more drastic actions, such as entering a debt management program or filing a consumer proposal. 

Read this to learn the main differences between these two debt relief options

Debt Management Program vs. Consumer Proposal 

Debt management programs and consumer proposals are some of the most extreme debt relief options that you can apply for in Canada, so it’s best to do research beforehand. Here are some important things to know about both options.

What Is A Debt Management Program (DMP)?

Also called a debt management plan, a DMP is an informal process that you can sign up for through a credit counselling agency. Following a meeting to assess your financial situation and options, a credit counsellor will negotiate with your creditors and attempt to arrange a plan for you to repay your debts with a single consolidated monthly payment.

You’ll then have up to 5 years to finish your payments. After your DMP is complete, it’ll show up on your credit report for 2 years, which may have a negative impact on your credit scores.    

Types Of Debts Covered In A DMP

If you and your creditors reach an agreement, most unsecured debts are eligible for a DMP, such as credit card debt and unsecured loans or lines of credit. However, secured debts like mortgages and car loans aren’t eligible.

Advantages Of A Debt Management Program

  • Interest Rates Are Reduced During a DMP, you may only have to pay your principal debt balance. Creditors will sometimes forgo all or part of your interest.  
  • Debt Is Consolidated – Even if you have multiple debts to cover, a DMP lets you consolidate them into one monthly installment, which can be easier to handle.
  • Keep Your Assets A DMP is an informal proposal for unsecured debts, which means you won’t lose your assets, as is the case with bankruptcy.    

Disadvantages Of A Debt Management Program 

  • No Debt Reduction With a DMP, you’re usually responsible for paying 100% of your principal debt. This may be a hefty amount, even without interest or penalties.   
  • Creditors Don’t Have To Agree Creditors aren’t legally obligated to accept a DMP. Many would rather hire a collection agency or bring you to court for wage garnishment.
  • No Creditor Protection – Since a DMP isn’t legally binding, creditors are still allowed to contact you during certain hours or withdraw from the agreement. 

What Is A Consumer Proposal?

A consumer proposal is a legally-binding debt relief process where you work with a Licensed Insolvency Trustee (LIT) to create a debt repayment plan. Typically, this involves paying a portion of debts in installments, extending your payment term, or both. All fees are regulated under Canada’s Bankruptcy and Insolvency Act.  

Like a DMP, your consumer proposal payments need to be completed within five years, but once the process is over, there will be a three-year negative impact on your credit score. 

Types of Debts Covered By A Consumer Proposal

Almost any secured or unsecured debt can qualify for a consumer proposal, except for:

  • Spousal or child support payments
  • Fines or monetary penalties imposed by the courts
  • Debts resulting from fraud
  • Select student loans (if you ended full or part-time studies 5 to 7 years ago) 

Advantages Of A Consumer Proposal

  • Keep Your Assets A consumer proposal can help you pay back a significant amount of debt while letting you retain your assets, including tax refunds, equity and investments.
  • Reduce Debt Consumer proposal payments are based on your assets, income and expenses. You may only repay a portion of what you owe, without interest.
  • Creditor Protection Once the process is in effect, creditors can no longer call you, garnish your wages, charge you more money, or back out of the agreement.   
  • Pay Off Proposal Early Your payments won’t change during your proposal term, but you’re allowed to repay your full balance any time, without penalty.    

Disadvantages Of A Consumer Proposal

  • More Time In Debt If you don’t finish your consumer proposal early, you could end up making payments for longer than you would with a bankruptcy or DMP.  
  • Proposal Terms Your proposal will be cancelled if you don’t follow its conditions responsibly, which means you can’t miss any payments or finish your plan late.  
  • Longer Credit Impact Remember, a consumer proposal can negatively affect your credit for three years after your payments are done (1 year longer than a DMP). 
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Credit Score Impact: Debt Management Program vs. Consumer Proposal

A good credit score is one important part of qualifying for credit products with low-interest rates. So, before you choose between a DMP or consumer proposal, it’s important to understand the negative effect that both debt relief options can have on your credit: 

How Will A Debt Management Plan Affect Your Credit?

A debt management program will appear on your credit report for two years after your final payment. Any accounts being consolidated in the process will also receive an R7 credit rating. All of this will cause a temporary but significant decrease in your credit score.   

How Will A Consumer Proposal Affect Your Credit?

A consumer proposal has a slightly worse impact on your credit, leading to a three-year negative mark on your credit report after completion (a maximum of 6 years for the entire process). Any accounts involved will also have an R7 credit rating during that period.  

Should You Enter A Debt Management Program Or Consumer Proposal?

As you can see, both of these debt relief options can have a lasting negative impact on your credit score and financial profile. Because of that, there are specific times when you should and shouldn’t consider entering a DMP or consumer proposal in Canada: 

Choose A Debt Management Program If…

You have the ability to repay your principal debt balance, but not the interest. Generally, a DMP is a good choice if you have lower amounts of debt, such as $10,000 to $15,000.  

Choose A Consumer Proposal If… 

You need a legally-binding solution for $5,000 – $250,000 of unsecured or secured debt, with guaranteed creditor protection, flexible payment options, and a maximum term of 5 years (60 months). Plus, you might only pay a portion of what you owe, interest-free. 

DMP vs Consumer Proposal FAQs

Can a creditor change their mind and withdraw from the agreement?

A debt management program is an informal process, which means a creditor isn’t obligated to accept it and can choose to withdraw from it at any time. However, a consumer proposal is legally binding, so a creditor can’t back out of the agreement.  

How long do you need to make payments for a DMP vs. a consumer proposal?

If you sign up for either of these debt relief options, you’ll need to make payments toward your creditors for no more than 5 years (although paying earlier can be better). 

What’s the cost of a debt management program vs. a consumer proposal?

When you enter a consumer proposal, any court-related fees will be regulated under the Bankruptcy and Insolvency Act. You may want to pay for legal representation too. On the other hand, a for-profit credit counsellor can charge their own prices to administer a DMP. Service fees are regulated in some provinces and territories but could include: 
  • Initial setup fee
  • Monthly maintenance fee
  • Membership fee
  • Application fee
  • Upfront/creditor fee
Even if you hire a non-profit credit counsellor, you could get charged indirect fees, since non-profit organizations are subject to the same provincial and territorial regulations.    

Looking For Debt Relief?

Then it might be time to think about entering a debt management program or consumer proposal. As long as you’re comfortable with the potential consequences, getting help from a credit counsellor or Licensed Insolvency Trustee is a major step toward dealing with your debt. 

Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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