Credit Counselling in Canada: How It Works and What a Debt Management Plan Does

Credit counselling is a review of your budget and debts by a counsellor at a credit counselling agency, usually a non-profit, ending with a plan: a budget you manage yourself, a debt management plan (DMP) run through the agency, or a referral to a Licensed Insolvency Trustee. This page covers what happens in a session, how a DMP works and what it does to your credit, what it costs, and how to tell a legitimate agency from a company selling debt relief. How a DMP compares with a consumer proposal and bankruptcy is set out in the debt relief options guide, and the debt strategies hub lists every guide.

What happens in a counselling session

A first session usually takes about an hour, by phone, video or in person. The counsellor goes through your income, regular expenses, debts and any arrears, and then explains which options fit. Non-profit agencies generally don’t charge for this first session, and it doesn’t appear on your credit report.

The outcome is one of a few paths:

• A budget you run yourself, when the numbers work once spending is reorganized. Some agencies follow up with coaching or courses.
• A debt management plan, when the debts can be repaid in full but the interest makes it impossible on the current budget.
• A referral to a Licensed Insolvency Trustee, when the debts can’t realistically be repaid in full. Only a trustee can file a consumer proposal or bankruptcy.
• Referrals to other help, such as a rent bank, utility assistance or a legal clinic, when the immediate problem is a bill that can’t wait.

Bringing recent pay stubs, the latest statement for each debt, a rough list of monthly expenses, your most recent notice of assessment and any letters from collectors makes the session faster and the advice more precise.

How a debt management plan works

A DMP is a voluntary agreement between you and some or all of your creditors, arranged by the counselling agency. The agency proposes a repayment schedule to each creditor; those who accept it stop collection action, and many reduce or remove interest. You then make one monthly payment to the agency, which pays the creditors under the plan.

The key features:

• You repay the full balance. A DMP doesn’t reduce what you owe, only the interest and the number of payments. The Office of the Superintendent of Bankruptcy describes it as paying back the entire debt, “but sometimes without interest.”
• Unsecured debts only. Credit cards, unsecured lines of credit, personal loans and collection accounts can go in. A mortgage or car loan stays outside and keeps its own payments; secured loans explains the difference.
• Each creditor decides. A creditor that doesn’t agree stays outside the plan and can keep collecting, so the plan is only as strong as the creditors who sign on.
• Cards in the plan are closed. Any credit card included in a DMP has to be closed and cancelled. Cards left out of the plan can stay open, though agencies usually ask you not to take on new debt.
• Length. Plans are set so the debt is repaid within a few years, commonly up to about five.

What a DMP does to your credit report

Entering the plan is reported on your credit file. The Office of the Superintendent of Bankruptcy says that for 2 years after you complete a DMP, your credit report will show that you made payment arrangements with a credit counsellor. On-time plan payments, low balances on any remaining accounts and time rebuild the score; how to read your credit report explains what lenders see.

A missed plan payment can cause creditors to withdraw from the plan and resume collection, so the payment needs to fit the budget with some room.

What credit counselling costs

Fees for credit counselling and DMPs aren’t regulated, and they vary from agency to agency. Non-profit agencies typically offer the first session free and, if you enter a DMP, may charge a modest monthly fee that’s built into the plan payment. Ask for every fee in writing before signing anything.

Choosing a legitimate agency

Credit counselling is provincially regulated. Signs of a legitimate agency:

• it’s a registered non-profit, or a member of a recognized association such as Credit Counselling Canada, the national association of non-profit agencies;
• it explains every option, including ones it doesn’t offer, and refers you to a Licensed Insolvency Trustee when the debt can’t be repaid in full;
• it states its fees in writing before you sign.

Well-known non-profit agencies include Credit Counselling Society, Credit Canada and, in Alberta, Money Mentors.

Warning signs are large upfront fees, pressure to sign on the first call, promises to remove accurate information from your credit report, advice to stop paying creditors and send the money to the company instead, and claims of a “government debt forgiveness program.” Those are typical of for-profit debt settlement firms; the debt relief options guide covers these scams.

A Licensed Insolvency Trustee is a different professional: federally licensed, the only one who can file a consumer proposal or bankruptcy, and, according to the Office of the Superintendent of Bankruptcy, obliged to review all your options with you, including a referral to a credit counsellor.

When a DMP isn’t the right fit

A DMP works when the full balances can be repaid over a few years once interest is reduced. It doesn’t fit when the payment would still be unaffordable, when key creditors refuse to join, or when the main debts are secured or owed to the CRA (the CRA arranges its own payment arrangements for taxes owed). In those cases the alternatives are a consumer proposal or bankruptcy, negotiating with creditors directly, or, if credit is still good, a debt consolidation loan or a balance transfer card.

Money stress often goes along with debt problems; the debt and mental health guide lists free support alongside the financial help.