
Are you struggling to manage your debt and improve your credit score? Getting out of debt can be a daunting experience, but with the help of a debt management plan (DMP), you can take the first step to correcting your financial difficulties and living a debt-free life.
Stick around as KOHO explores how a debt management program (DMP) in Canada works, its benefits, and its impact on credit scores.
What is a Debt Management Plan (DMP)?
A debt management plan, or DMP for short, is a program designed to help individuals manage their debt effectively. It involves consolidating multiple debts into a single monthly payment, making it easier to keep track of and manage finances. There are various types of debt management programs available, each tailored to suit different financial situations.
How a DMP Works
Setting up a debt management program in Canada involves several steps. Here's what you'll need to do if you're considering this financial solution:
1. Find a credit counselling agency
First, you'll need to seek out an accredited credit counselling agency offering a debt repayment program. When you first begin working with them, the credit counselling agency will take a look at your financial situation and determine if a debt management program is the right option for you.
2. Negotiate lower interest charges
Once a credit counselling agency has determined that you qualify for a debt management plan and you've signed your voluntary agreement, a trained credit counsellor will negotiate with creditors to lower your interest rates, potentially eliminate interest charges, and create a manageable repayment plan for you moving forward. Once this has occurred, you'll apply for a debt consolidation loan.
3. Pay a single affordable monthly payment
With a debt management plan in place, you'll then begin making a single monthly payment to your credit counselling agency to begin paying back your debt consolidation loan. Your credit counsellor will then distribute your one monthly payment to creditors until your payment schedule has come to an end. This debt management and consolidation — and potential reduction in interest rates — will ultimately help you regain control over your finances.
Example of
With everything we've just gone over in terms of how a debt management plan works, let's look at an example:
Imagine you have $10,000 in credit card debt spread across multiple cards with varying interest rates. With a debt management program, you can consolidate these debts into a single monthly payment, potentially lowering your interest rates and saving you money over time. So, rather than paying $500 across several different debt and high-interest loans a month, you'd pay one affordable monthly payment of $230.
This makes managing your debt more manageable by remaining within your monthly budget and allows you to make progress toward becoming debt-free.
Does a DMP cost anything to set up?
Many credit counselling agencies and organizations that offer debt management program services charge setup and monthly fees when you enroll in a debt settlement program. These fees can vary, and they’ll often be folded into your overall debt management plan payment.
According to Money Management International in the United States, the average DMP costs $33 to set up and $24 per month in 2022. That being said, there are non-profit credit counselling options available to Canadians who may not be able to afford the added fees.
How long does a debt management plan last?
A debt management plan can vary in length. However, most credit counselling agencies offer a maximum of 60-month repayment periods. So, when working with a credit counselling service, the longest you'll be in debt is five years if you stick to your plan.
That being said, your credit counsellor will take a look at your total debts, budget, and debt payments to determine what repayment period is right for you.
Debt management plan pros
If you're still undecided about whether a debt management program is the right form of debt relief solution for you, take a closer look at some of these benefits below:
Less stress with one monthly payment
One of the main benefits of a debt management plan is the reduction of stress that comes from managing multiple debts. By consolidating your debts into one manageable payment, you can focus on making progress toward paying off your debt rather than worrying about juggling multiple payments.
May help you avoid bankruptcy
A debt management plan can help you avoid more drastic measures, such as filing for bankruptcy, which can have long-term negative consequences on your overall credit history.
Potential interest relief
Another advantage of a debt management plan is the potential for lower interest rates. Through negotiations with creditors, the credit counselling agency may be able to secure lower interest rates, saving you money and helping you pay off your debt faster.
Can help you develop money management skills
Overall, a debt management plan can provide you with a clear path toward better financial management and help you achieve your goal of becoming debt-free.
When is the best time to start working with a credit counsellor on a debt management plan?
So, when should you begin working with a credit counsellor? Generally speaking, if you have over $10,000 of debt, you may want to consider working with a credit counsellor. If you're in debt, the best time is now, as it can help you move toward a better financial future for yourself in no time.
What is bankruptcy?
Bankruptcy is a legal process that provides individuals and businesses with a way to seek relief from overwhelming debt when they are unable to pay their creditors.
Filing for bankruptcy involves working with a Licensed Insolvency Trustee (LIT) to assess one’s financial situation and discuss options.
The LIT helps the debtor prepare and file the necessary paperwork, including a list of all the filer’s assets, liabilities, income, and expenses.
Once bankruptcy is declared, creditors are prevented from taking further collection actions, such as lawsuits, wage garnishments, or repossessions.
The debtor's non-exempt assets may be sold, and the proceeds are used to pay off a portion of their debts.
The debtor is eventually discharged from bankruptcy, typically after nine or 21 months, depending on their situation and whether they have been bankrupt before. Once discharged, the debtor is released from most of their unsecured debts, and they can make a fresh financial start.
While bankruptcy can provide relief from overwhelming debt, it also has lasting consequences, including a negative impact on the debtor's credit score and report for several years.
What is the difference between debt and income ratio?
Debt vs. income ratio--what is it, and what does it mean? Debt vs. income ratio, also known as a debt to income ratio, is a financial metric that represents an individual's monthly payments towards their debt, compared to their gross monthly income.
The higher an individual's debt-to-income ratio is, the more reliant on borrowed money they are compared to their gross income. In other words, it can signify to creditors that they are living outside of their means. Most creditors agree that a debt-to-income ratio should remain at around 30% or lower. Anything higher can be deemed a red flag on your credit report.
To calculate your own debt-to-income ratio, you'll need to calculate your monthly debts and determine your gross monthly income before dividing your debts by your income level. Once doing so, you'll need to multiply the result by 100 to see it as a percentage.
For example:
Total monthly payments: $2000
Gross monthly income: $4500
DTI Ratio: ($2000 / $4500) divided by 100 = 44%
Ultimately, knowing what your debt-to-income ratio is can help you plan your finances better and stay on top of your debts.
What happens if you don't make payments to your credit counselling agency?
Unlike a consumer proposal, which is a legally binding agreement made between an individual and a licensed insolvency trustee, you can drop out of a debt management plan at any time, given that you are voluntarily enrolling yourself for the help of a credit counsellor.
What is the difference between secured debt and unsecured debt?
All debt can be categorized into two categories: secured and unsecured. So, what are the differences between secured vs. unsecured debt? Take a look below:
Secured debt
One of the most notable features of secured debt is that it requires the lender to put forth collateral. The collateral, which is a high-value asset like a vehicle or home, serves as the lender's security in the event that the borrower fails to repay the loan. Ultimately, with a secured loan, the lender has the legal authority to take possession of and sell the collateral in order to recover the remaining debt.
Unsecured debt
Unsecured debts, on the other hand, do not require collateral from the borrower. Whether or not an individual is approved for a loan or higher credit limit depends on their credit rating, income, and previous payment schedules. Ultimately, given that there is no collateral involved in this type of loan, the lender relies on the promise of the borrower to make their repayments.
What is low-interest debt?
Low-interest debt is considered any interest charges that are under 5%. Anything over 5% is considered high interest. Because high interest rates equate to more money owed, the best thing you can do is try and pay off your high-interest loans first. This includes payday loans or credit cards that typically have an APR as high as 23.99%.
While credit cards are a convenient way to buy now and pay later, without the right financial management plan in place, you can quickly push yourself into a cycle of debt that has high-interest charges that continue to accumulate each month you do not pay off your loan balance.
What is the difference between debt financing and equity financing?
When talking about debt, you may hear the terms debt financing and equity financing. So, what do these terms mean, and what is the difference between debt financing vs. equity financing? Let's unpack this below:
Debt financing
Debt financing occurs when a business obtains capital by borrowing money that has to be paid back over time, usually with interest. This sort of borrowing can often be arranged through business loans, lines of credit, and bonds provided by financial institutions, banks, or third-party lenders:
Business loans: Traditional business loans are typically acquired through banks or credit unions. These loans most notably feature a fixed interest rate and repayment term.
Lines of credit: A line of credit works similarly to credit cards. Borrowers are able to borrow funds up to a credit limit. However, they are only required to pay interest on the money they borrow.
Asset-based financing: Asset-based financing allows businesses to secure loans by using their assets like inventory or accounts receivable as collateral.
Bonds: Bonds are a type of debt security that is issued by the corporation themselves or the government in order to raise capital. Bonds generally offer fixed interest payments and repayment schedules, similar to business loans.
Equity financing
Equity financing is the process of obtaining capital for a company by distributing ownership interests to shareholders in return for funding. In contrast to debt financing, which includes borrowing and repaying funds with interest, equity financing is selling a piece of the company through shares or stocks. Interested investors essentially become shareholders and partake in the business's revenue and development, typically acquiring voting privileges and influence over corporate decisions. The types of equity financing include:
Venture capital: A type of institutional investing that helps fund start-ups or large companies for equity in return.
Angel investors: These types of investors offer funding in exchange for convertible debt or ownership equity in the business.
Private equity: Investments made into businesses by private equity firms with the goal of generating a profit.
Initial public offering: The process of providing private corporation shares to members of the public in order to raise capital from public investors.
SPEND SMARTER. SAVE FASTER
Is it possible to pay off debt in a year?
Whether paying off debt in one year is possible or not depends on how much debt you have and how committed you are to making minimum payments or more toward your debt each month. Paying off debt, regardless of the amount, will require sacrifices. It's essential that you get serious about your plans for spending and saving during the process.
While you may need to cut back on your favourite items throughout the year, there is light at the end of the tunnel. Sticking to a debt relief solution in the meantime can open up numerous financial opportunities for you in the future. If you don't feel comfortable making debt payments on your own, consider working with a credit counsellor who can help you navigate a customized debt management plan that meets you where you are and helps guide you along your journey.
What happens when debt is sent to collections?
Navigating debt in collections can be confusing. If this is something you're dealing with currently, you may have numerous questions regarding your financial situation and what it means for your financial future.
First things first, what is debt collection? Debt collection takes place when lenders attempt to reclaim outstanding debts from people or corporations. Basically, when you miss your monthly payments on personal loans, car loans, credit cards, or other monetary obligations for a prolonged period, the lender may choose to try to collect the debt themselves or hire a third-party agency to do so on their behalf.
Once your debt is sent to a collections agency, the agency will use various methods, whether it be phone calls, letters in the mail, or even legal action, to ensure your debts are paid. In some scenarios, the collections agency may be willing to negotiate a payment plan.
To avoid collections altogether, it's extremely important that you make your monthly payments on time. If you have trouble remembering to pay your credit bills or other loans, consider setting up automatic payments through your bank account. If this isn't possible, schedule a calendar reminder each month.
Another thing you can do to avoid your debts going to a collections agency is to consolidate your debt and work with a credit counselling agency before your total owed grows even more. Recognizing you have a money management problem early on can help you seek the help you need before things get out of control.
What most commonly gets people into debt
In reality, numerous scenarios and spending habits can throw people into a cycle of debt that is difficult to recover from. That being said, here's a closer look at some of the most common reasons why Canadians find themselves with mounting debts that require the help of a credit counselling organization:
Loss of employment.
Unexpected bills that have accumulated over time.
Overuse of credit cards.
High-interest payday loans.
Declining health or medical expenses.
High cost of living.
Pursuing higher education.
A lack thereof or insufficient emergency funds.
If your financial situation is causing you immense stress due to the above, working with a credit counselling organization can help with your debt management moving forward.
Does a Debt Repayment Program Affect Your Credit Report?
Many individuals considering a debt management plan are concerned about its impact on their credit score and overall credit report. Credit score and debt management are closely intertwined.
In the short term, enrolling in a debt management plan may have a temporary negative impact on your credit score. However, as you make payments regularly and demonstrate responsible financial behaviour, your credit rating can begin to recover.
It's important to remember that paying off your debt through a debt management plan in place shows lenders and creditors that you are taking proactive steps to manage your debt, which can be viewed positively in the long term. While using a DMP, it's essential to understand how debt affects credit scores.
Timely payments and responsible financial behaviour can help maintain or improve your credit score over time. It's also recommended to regularly monitor your credit report and work on building good credit habits while utilizing a debt management plan.
Credit Building Help with KOHO
At KOHO, we understand the importance of credit scores and offer assistance in credit building. KOHO is a financial platform that provides a range of tools and resources to help you improve your credit score and achieve your financial goals, like our monthly credit-building program that reports directly to credit bureaus like Equifax.
If you want to build your credit with KOHO, you should also consider opening a virtual credit card with overdraft protection coverage. You can even get a cash advance of up to $250 with no interest charges!
We believe in empowering individuals to take control of their financial health. That's why we encourage you to explore additional KOHO credit-related guides and blogs, where you'll find valuable insights and strategies to boost your credit score. Not sure what your current credit score is? Get a free credit score check with us!
Beyond credit-building features, KOHO can also help you save money for the future! With our high-interest savings, you can gain a return on the money you deposit into your account! Ultimately, with the right tools and resources, you can build a strong credit foundation and secure a brighter financial future.
Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up-to-date account information!

About the author
Niki is a communications specialist with years of experience as a freelance and marketing agency content writer. With a knack for storytelling, Niki enjoys working with businesses from diverse industries to craft engaging content that resonates with target audiences worldwide.
Read more about this author