Debt Management Plans (DMP)

Debt Management Plans (DMP)| by Guest Author Linda Stern, Licensed Insolvency Trustee 


For a vast majority of people, debt problems occur through no fault of their own. These financial challenges start out rather unassumingly. Help is often within reach, but few individuals in debt realize the gravity of the situation until it is too late. Here is a story of how our clients, Sandra and Jeff, spiraled into unmanageable debt and then worked their way out of it, using a Debt Management Plan, also referred to as a DMP.

Sandra & Jeff’s Story

In 2012, Sandra P. was a 34 year-old self-employed Registered Massage Therapist who treated clients by renting space from two separate wellness centres, one in Thornhill and another in Etobicoke. She was married to 36 year old Jeff P.  who held a steady job as a lab technician. They lived in Thornhill with their sons, aged 5 and 2. 

Like so many, this was a busy, middle-class household. They juggled schedules to accommodate their full-time jobs and childcare routines. Jeff’s bi-monthly pay cheque covered their living expenses like mortgage, property taxes, utilities and car leases. These expenses came out as automatic deductions from his account. And they used Sandra’s fluctuating income for other expenses, like groceries, gas, clothing and childcare. She put most of those expenses on their credit card and paid it off each month.

Over the years, she had built a steady and regular clientele at both locations. Generally, around the last two months of each year, Sandra’s income would peak. This is when she saw more clients with insurance plans, as they rushed in to maximize their benefits before the cut-off date. She usually set the surplus funds aside for treats like family vacations. While they did not consider themselves flush with money, they were managing. 

When Misfortune Strikes

At the end of December 2012, the Etobicoke wellness centre shut its doors. They were not able to renew the lease with their landlord. Most of Sandra’s clients were unwilling to commute to Thornhill to continue their therapy sessions with her at that location. She tried to mitigate the loss by looking for another location in the area to practice from, but to no avail. Consequently, starting 2013, along with her valuable clients, went almost half her income. 

The Thornhill clinic could not offer her more hours. For years, they rented the same therapy room to another physiotherapist, along with Sandra. Both worked complimentary part-time hours and the clinic did not want to change those long-standing arrangements. Consequently, while Sandra figured out what to do next, the expenses continued to accrue. Believing this to be a temporary setback at first, Sandra dipped into the surplus fund, conceding there would be no family vacation that year. That money was depleted by June 2013. After that, Sandra resorted to carrying a balance on their credit card, only paying the minimum balance when the bills were due. 

Spiraling Debt

Over the year, they cut back on many discretionary expenses, even pulling the kids out of childcare on the days when Sandra was not working. Regardless, her part-time income was simply not enough to cover the shortfall. They were not splurging but they were, after all, a family with two young children. Some expenses simply could not be cut back.  

And, typical of many in her situation, Sandra kept the reality of their finances from Jeff. She had always taken care of their credit card bills and as a couple, they had never established a regular dialogue about their finances. With two kids in tow, life became busy. And the opportunity never came up. Jeff did not see the bills and assumed they were managing. In fact, he believed it did Sandra a lot of good being home more with their children.  

Yet Sandra’s reality was different. Each month, she put more bills on their credit card. And she watched it balloon like the mushroom cloud of an atom bomb. The astronomical compounding interest rate of 22% had firmly kicked in making the debt load worse. She was overcome with shame blaming herself for her loss of income.

By Christmas of 2013, Sandra was completely distraught, exhibiting signs of stress, anxiety and depression and their marriage was suffering. She was raising two kids, working part-time and silently coping with a mounting debt problem. She had maxed out the $10,000 limit on their credit card. It compelled her to take advantage of a new offer, a second credit card that offered a $10,000 limit with no-interest terms for 3 months. 

The Breaking Point

By the spring of 2014, the interest rates kicked in on that second card. And Jeff took note that Sandra was quite unwell. He raised concerns, convincing her to seek medical help. And that is when she hit a breaking point. She told him about their debt problem. In a little over a year, they were almost $20,000 deep in mounting credit card debt.

Fortunately for Sandra, her physician recognized their debt as the core source of her health problems. In addition to medication for Sandra, she asked them to seek credit counselling. And that is how Sandra and Jeff received a referral to Shaheen A., a licensed credit counsellor, who has worked with Family & Credit Counselling Services of York Region for over 14 years. They met with her in June 2014.

Credit Counselling

Shaheen took charge of the situation, setting their minds at ease at the very first meeting. She was nonjudgmental and explained how common their situation was. Very few people knowingly get into debt. For most, it occurs for reasons beyond their control. Sandra and Jeff simply required the know-how to get their debt under control. Firstly, they needed financial literacy around budgeting to ensure their spending remained relative to their income; secondly, they needed the compounding interest to stop so they could catch up and finally, they required a plan to repay the debt.

She explained how her services operated. She would assess their debt load against their income, lifestyle and spending patterns to set a budget. From there, she would negotiate with their creditors directly to set a manageable repayment plan. While she did not charge up front for her services, she would add a modest 10% fee to the total debt load if they signed up for the Debt Management Plan (DMP) she developed for them.

She sent them home with a spreadsheet to capture their actual income and expenses and encouraged them to return promptly, within a week, for a follow up. Speed was of the essence because of the severity of their compounding interest. It was growing fast each month, driving them deeper into debt. While Shaheen could negotiate with creditors to stop the interest, they had to be on a DMP before she could start this process. A quick resolution would also go a long way to help Sandra with her stress and anxiety.  

Credit Loss

Like most people in this situation, the biggest concern Sandra and Jeff had to come to terms with was losing access to their credit cards if they signed up for a Debt Management Plan. Shaheen had explained that their problem began with access to high interest credit. To get out of it, the bleeding had to stop from the source. 

Credit cards are a very convenient place to go to for cash shortfalls in emergencies. Losing this privilege was a scary proposition for Sandra and Jeff. However, they took into consideration the option of transitioning to prepaid credit cards which would still offer them convenience. If they could develop a workable budget, a prepaid card could work. They would just have to diligently stick to the budget.

Credit Rating

Another issue they looked at was their credit rating. Because Sandra had only paid the minimum balance, credit bureaus had already lowered their credit scores.  And a DMP would make this worse. This would impact negotiations for their mortgage, which was coming up for renewal in 2-1/2 years. They would likely not qualify for the lowest mortgage rates.

On this issue, Shaheen advised them to keep the long-term game in mind. They would have to suffer some short-term pain if they truly wanted to get their debt under control. Spiraling credit card debt required decisive action. With Shaheen’s guidance it could be repaid within 5 years. It was their only means of repairing their credit history for the long run.

Sandra and Jeff considered all their options and they decided to proceed with Shaheen.

Creating a Budget

When Sandra and Jeff returned with their homework completed, Shaheen reviewed their full financial situation and was ready to make recommendations.

First, she came up with a manageable budget. Even though they had cut back, Shaheen discovered places they could trim their spending even further. The first one concerned their two vehicles. Sandra no longer needed to commute to Etobicoke. Could they manage with a single vehicle? Jeff was still buying lunch daily and their spending for their kids’ clothing was higher than it should have been. With some lifestyle changes, Shaheen theoretically got them to a point where their financial bleeding could stop.

The big opportunity Shaheen pointed out was their basement, which had a separate entrance and washroom. Could it be converted into an Airbnb suite or rental? Shaheen asked them to consult with an accountant about the tax implications of doing this to ensure they came out financially ahead. With those options on the table, Sandra and Jeff started seeing some light at the end of the tunnel.

Repayments with the Debt Management Plan (DMP)

Shaheen then reviewed the debt load of $20,000 between two creditors. Pending negotiations for reduced or eliminated interest terms, she presented them with a Debt Management Plan for $22,000, which included fees for her service. Family & Credit Counselling Services of York Region would be their new creditor. They would never have to deal with two separate credit card debts and Shaheen would try to substantially reduce or remove the interest rate penalties. 

Their new consolidated debt was repayable over 60 months (5 years), resulting in payments of $370 per month. She recommended they pay it through automated deductions from Jeff’s account every two weeks, at $185, to coincide with his pay cheque. 

In August 2014, Sandra and Jeff signed a DMP agreement which provided Shaheen with permission to commence negotiations with the creditors. If all went well, they would be debt free by September 2019.

Negotiating with Creditors

Shaheen already had a good relationship with both credit card companies. Lowering and even eliminating the interest rate charges was key for stopping this debt from mounting. It offered this couple the best chance to catch up and pay it off.  

Shaheen, therefore, approached the creditors with a proposal that recommended a realistic and manageable repayment schedule to both. Sandra and Jeff were not chronic debtors. They were neither big spenders nor careless about their money. This regular, middle-income couple had simply hit hard times due to unforeseen circumstances. By signing up for the DMP, they demonstrated a willingness to proactively deal with their debt while acquiring financial literacy to help them along. Sandra was coping with her stress and anxiety with the help of medical professionals.  

When creditors evaluate their risk, they leave room open for negotiations. A DMP is the best of a bad situation for them. It allows them to recover their money without escalating it to a collection agency.  Other alternatives discussed with Shaheen included a consumer proposal or bankruptcy, but based on Shaheen’s recommendations and the couple’s circumstances, they opted for the DMP.  At the end of the negotiations, the creditors stopped the interest effective the date of the DMP.

This was welcome relief for Sandra and Jeff. With all that weight lifted, they were engaged and motivated to pitch away at the debt as laid out in their Debt Management Plan.

Payment Setbacks

Things went smoothly for the first couple of years. They got rid of one vehicle, found a renter for the basement and adjusted their lifestyle so the monthly repayments under the DMP occurred on time. Sandra made great progress with her mental health. She raised her rates each year at the Thornhill clinic. Jeff’s modest salary increases eventually put them in the black. And they wisely put this surplus towards their consolidated debt.

But this was short lived. In December 2016, their mortgage came up for renewal. With interest rates rising,  their monthly mortgage payments went up by $320 per month. Inflationary rising costs had also seen their property taxes and utilities rise, along with groceries and fuel. They diligently kept to their budget, but without credit they were starting to feel the pinch. Sandra was constantly running out of money for groceries on their prepaid card before the end of the month.

They decided to visit Shaheen again in January 2017.

DMP Adjustment

Once again, Shaheen came through with solid advice. When fixed costs rise, it is perfectly acceptable to revisit the budget and adjust the bi-monthly repayments to what is tenable. She contacted the creditors, highlighting Sandra and Jeff’s excellent repayment history – they had not missed a single payment and remained fully committed to repaying the entire amount of the debt. In addition, Shaheen agreed to defer the agency fee portion to the end of the term, leaving them with some room to breath.

Seeing that Shaheen was making concessions on her fee too, the creditors agreed to lower bi-monthly payments to $100 for six months, hoping their income situation improved.

Sandra and Jeff Today

And it did. Sandra found additional part-time hours on Saturdays at a second location in the area. This allowed them to increase their payments and shorten the repayment timeline. As 2019 begins, Sandra and Jeff have come a long way. They have repaid a very large portion of their original debt and remain committed to making their final payment by June 2019. 

Looking back, they are thankful they opted to get their debt under control with a DMP.  Had they ignored it and continued with minimum payments to the credit card companies, they would have accrued over $11,700 in interest payments on their original $20,000 debt!    

Debt Management Plans are one of many financial instruments available to debtors to repay unmanageable debt. Sadly, many suffer unnecessary stress because they don’t realize this type of help exists.


Linda Stern | Licensed Insolvency TrusteeLinda Stern, a Licensed Insolvency Trustee, is a guest blogger for Family and Credit Counselling Services, a blended not-for profit community-based agency offering debt counselling & management as well as family/individual support services within York region.

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