Debt Management Programme or Consumer Proposal

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February 10, 2023

In this article we will discuss whether you should choose a Debt Management Programme or Consumer Proposal – beware of wolves in sheep’s clothing.

Debt Management Programme (DMP)

Credit Counselling Agencies are actually Licensed Collection Agencies and are regulated under the Collection Agencies Act as well as the  Collection and Debt Services Act.  Credit Counselling Agencies have no legislative authority to protect you from legal action, collection activity, lawsuits, wage or bank garnishees.  Debt Management Programmes are voluntary arrangements that are usually accepted by banks and other large lenders based on pre-existing contractual arrangements.

Credit Counselling Agencies get paid by a commission from the lenders – the Canadian Bankers Association has agreed to pay a collections commission of 22.5% from the funds Credit Counsellors collect.  Partly because of their commission agreements, Credit Counselling Agencies will not negotiate reductions on your debts, to do so would reduce their income.  Additionally, Credit Counselling Agencies charge you a Set Up Fee and a monthly Administration Fee.

Because Credit Counselling Agencies are registered as Not for Profit (Charitable Organizations) some issue Charitable Donation Receipts in return for the collection commissions paid.  Credit Counselling Agencies make referrals to Licensed Insolvency Trustees when DMP clients can no longer maintain their DMP payments, or when their income is so low, they can’t afford to do one.   Referrals are only made to LITs who financially support Credit Counselling in some manner.

DMPs hurt your credit report in the same way as Bankruptcies and Proposals.  Credit Bureaus react in the same manner as they would with a Consumer Proposal, credit ratings are often already in bad shape when consumers meet with Credit Counsellors or a Licensed Insolvency Trustee.  For the life of the DMP (4-5 years) your credit rating drops to an R-9 and is upgraded to an R-7 for three further years following successful completion.  In other words, your credit rating is damaged for up to eight years.

Consumer Proposals

Consumer Proposals can only be filed by Licensed Insolvency Trustees (LITs).  Licensed Insolvency Trustees are highly trained debt professionals who have completed a college or university education before embarking on the five-year LIT training programme, which also includes an articling phase, for licensure by the Federal Government.  LITs are Officers of the Court and have standing in Bankruptcy Court that is very similar in nature to that of Lawyers.  LITs are bound by a strict code of ethics.

Consumer Proposals can reduce the face value of your debts very significantly, in many cases by more than 80%.  Filing a Consumer Proposal creates an automatic Stay of Proceedings which stops, blocks, or inhibits legal actions (in respect of any debts) against you.  The Stay of Proceedings also removes wage or bank garnishees, freeing up your paycheque.

Except in very rare cases, LIT fees are not paid “in addition” to the monthly payments under the proposal (there are no add on administrative charges like “Set Up Fees” or “Monthly Administrative Charges”).  The amount you pay each month covers the LITs fees while the remainder is distributed to your creditors.  All of your unsecured creditors are bound by the terms of the Consumer Proposal as long as at least 50% of them vote in favour.  Unlike a DMP you won’t have to deal with “leaky creditors” who didn’t like the arrangement and continued with collection actions against you.

Credit Reports will be very similar to those under a DMP, for the life of the Consumer Proposal (maximum of 5 years) your rating drops to an R-9 and is upgraded to an R-7 for three years following successful completion.

Summary Comparison.

Assuming you present with $60,000 worth of debt.

DMP payments:   $1,300 per month for 48 months – Total payments $62,400

Consumer Proposal Payments:   $200 per month for 60 months – early payout option – Total payments $12,000

DMP Legal Action Garnishees:  Continue against Debtor

Consumer Proposal Legal Action Garnishees:  Stopped against Debtor

DMP Credit Report:  Same level as bankruptcy until paid out, then 3 years at R-7.

Consumer Proposal Credit Report:  Same level as bankruptcy until paid out, then 3 years at R-7.

DMP Statutory Authority:  None

Consumer Proposal Statutory Authority:  Federal Bankruptcy & Insolvency Act.

Find out if a Consumer Proposal is the right option for you and your family, call 519-646-2222