Debt Management Program or Proposal

January 11, 2018

Debt Management Programs are offered by non-profit Credit Counsellors while only Licensed Insolvency Trustees can file Consumer Proposals. There are advantages and disadvantages to each option. In this blog we will discuss the differences and how each works.

The parties:

A Debt Management Program (“DMP”) is a voluntary arrangement between you and some of your creditors that is arranged by a Licensed Collection Agency acting as a not-for-profit credit counselling agency. A Consumer Proposal is a legal agreement between you and your creditors and can only be arranged by a Licensed Insolvency Trustee.

How they work:

A DMP can only be carried over a maximum term of 48 months and requires that you must pay the full amount of your unsecured debts, most without interest, plus a monthly administrative fee to the Agency. Most institutional creditors have standing agreements with non-profit Credit Counselling Agencies to accept the terms. Some creditors will still demand interest payments to accept the program and some will not accept them at all and continue existing collection activity.

A Consumer Proposal is filed under Federal Legislation, the Bankruptcy & Insolvency Act and requires creditors to participate. The maximum term of repayments is 60 months and in addition to suspending interest for all creditors the unsecured debts can be significantly reduced. Only 50% of the creditors to whom the proposal is made need to agree the rest must accept the terms after that level of voting has been reached. Although the overall average through our office was 26% of the value of claims, our office filed more Proposals at 15% than any other single value.

The fees:

Non-profit Credit Counselling Agencies have a standing arrangement with the Canadian Bankers Association and other mainstream creditors that allows them to retain about 25% of the money they collect as fees for service. The non-profit then issues a charitable donation receipt for those funds that the lenders use to reduce their taxes. Additionally, the agencies will charge you a monthly administration fee of about $50.00.

Licensed Insolvency Trustees are paid out of the money you pay into your proposal in accordance with a tariff set out in the Bankruptcy & Insolvency Act Rules. The tariff comes directly from the money paid for the proposal and there are no additional costs.

Payment comparison:

If your total unsecured debts were $60,000 and you filed a DMP, assuming all creditors agreed to the terms you would need to pay $1,300.00 per month for 48 months. That amount incudes the administration fee. In the case of a Consumer Proposal you would pay somewhere between $150.00 and $260.00 per month, on average, for a term of 60 months. That amount includes all disbursements and fees. In either case you will have an early payout option if something changes financially for you.

Credit Bureau:

The impact of either choice on your credit bureau report will be identical. Your creditors will report an R-9 during the life of the repayment scheme and that value will be upgraded to an R-7 for 3 more years after completion.