Debt management vs debt settlement – what’s the difference?

Posted on 9 December 2022

Written by Samantha Galea

Debt is a growing problem for many Canadians. With a rising cost of living and increasing interest rates, it is all too easy to slip into missed payments. Once you have missed a few payments, or perhaps gone into default, it can feel increasingly difficult to get yourself out of debt. One thing to remember is that no matter how bad you may feel your financial situation is right now, there is always a debt relief solution for you. Two of the most popular forms of debt relief in Canada are debt management plans and debt settlement. Both of these forms of debt relief can help when you are struggling with unmanageable debt, although each has its own advantages and disadvantages. In this article, we explore debt management vs debt settlement, and the pros and cons of opting for a debt management plan with a credit counsellor or going for a debt settlement with a Licensed Insolvency Trustee.

What is a debt management plan?

A debt management plan is an assisted repayment plan, often organized by a credit counselling agency. Debt management plans are usually used for repaying credit card debt and overdue bills. Once you enrol in a debt management plan, a credit counsellor will review your financial circumstances and assess your budget. They will then draft a monthly payment plan for you to catch up on any missed payments to help you repay your debts. Credit counselling agencies can also help you to negotiate to reduce down the interest rate on your debt, although they will never be able to reduce your debt. One of the key disadvantages of a debt management plan is that you will still need to repay all of your debt. Debt management plans are often confused with debt consolidation loans. Debt consolidation loans, in comparison, are new loans taken out with the intention of condensing multiple separate loans into one, often leading to a reduction in interest rate. In debt management plans, you make a single payment each month to the credit counselling agency who then distribute the payments to your various creditors until your debts are paid off in full.

What is debt settlement?

When it comes to debt management vs debt settlement, the two forms of debt relief are very different. Debt settlement generally means that you do not need to pay off all of your debt, and that instead you negotiate a reduction in the amount you owe. Debt settlements typically mean your monthly payments are much lower than those in a debt management plan. In Canada, there are two ways you can go about getting a debt settlement:

  • Via a for-profit debt settlement agency. Generally speaking, we advise against these. For-profit debt settlement agencies have a poor success rate, and most of their clients will pay fees without even settling with their creditors. Fees can rack up into the thousands on top of the debt settlement agreement you need to repay. Often, clients need to be referred to a Licensed Insolvency Trustee even after shelling out for for-profit support.
  • File a consumer proposal. Consumer proposals are a legal form of debt settlement. Filed by a Licensed Insolvency Trustee, a consumer proposal is the process of formally negotiating the amount of debt you repay with your creditors. Typically, it can reduce your unsecured debt by up to 80%. Consumer proposals are ideal for Canadians with a fair amount of unsecured debt, an income, and assets they do not wish to lose. It is a great bankruptcy alternative and a popular option for reducing debts including tax debt, student loan debt, and payday loans.

Debt management vs debt settlement – what are the differences?

While both forms of debt relief enable you to avoid bankruptcy, each has a different outcome.


Debt management plans are most useful for organizing repayments for individuals who can afford to make their debt repayments, but who perhaps need support in simplifying them into a single monthly payment. Debt settlement, on the other hand, attempts to gain a reduction in your debt because you cannot afford to make the full repayment.


Debt management plans are more expensive. Unlike debt settlements, you need to repay the full amount of your debt, as well as a fee to the credit counselling agency which is typically around 10%. Debt settlements, on the other hand, mean that you pay a reduced amount of the debt you owe, even as low as 20% of the total amount. You do not pay any fees for working with a Licensed Insolvency Trustee.

Debts handled

Both forms of debt relief handle unsecured debt, although Licensed Insolvency Trustees are able to settle a wider range of debts than those going through a debt management plan. If you owe multiple debts to different creditors, you should note that debt management plans are only voluntary – creditors are not obliged to comply with them. This is a key consideration if you owe debts like tax debt or payday loans, where creditors may not participate.

Credit report

Both debt settlements and debt management plans have a similar impact on your credit report. Whichever option you choose, a note will be added to the public records section of your credit report with a R7 rating. Both consumer proposals and debt management plans have slightly different impacts on your credit report, but generally speaking, both will be removed from your credit report around two to three years after the date of completion, or six years since you first filed – whichever is sooner.

Advantages of debt management plans

There are a number of benefits of a debt management plan, which are very similar to those of a debt settlement:

  • A credit counsellor provides solutions when you are struggling to repay your debts alone
  • You can make one monthly payment, simplifying your debt repayment
  • You are protected from your creditors participating in the program, ending their collection calls
  • Any debts enrolled in your debt management plan will be cleared when the plan is complete
  • You will receive ongoing credit counselling and money management advice

Disadvantages of debt management plans

A debt management plan will not work for everyone. As with every form of debt relief, there are some disadvantages of a debt management plan over debt settlement:

  • You need to repay the full amount of debt owed
  • Your creditors are not obliged to participate in a debt management plan
  • You may still be in collection if a creditor chooses not to participate, or if you leave out a debt
  • Payments can still be expensive because you need to repay your full debt, as well as a fee

Advantages of debt settlement

Much like debt management plans, debt settlements share similar advantages:

  • Licensed Insolvency Trustees will provide debt relief solutions when you are struggling to make your debt repayments
  • You are able to reduce your debts by up to 80%
  • A Licensed Insolvency Trustee negotiates with your creditors on your behalf
  • Your payments are simplified into one affordable monthly payment
  • A stay of proceedings offers full protection from your creditors
  • You will be cleared of your debts when your debt settlement program ends
  • You will receive ongoing advice and support from a Licensed Insolvency Trustee, a qualified expert and the only professionals in Canada legally able to file all forms of debt relief

Disadvantages of debt settlement

While a consumer proposal can enable you to reduce your debts and avoid bankruptcy, it is not the debt relief option for everyone:

  • You have to include all your unsecured debts into a consumer proposal; no creditors can be left out
  • You need to surrender your credit cards, although you may be eligible for a secured credit card after beginning your consumer proposal
  • You need to be insolvent to file, without sufficient assets to refinance

Ultimately, both debt management plans and debt settlement filed through a Licensed Insolvency Trustee can help you to sort your debt. If you have the income to repay your debts, a debt management plan may be the best option for you. On the other hand, if you need debt relief because you are struggling to make your repayments, a consumer proposal may be more appropriate for your circumstances. Your first port of call should be speaking with a reputable Licensed Insolvency Trustee about how you can begin a fresh financial future.

If you want to learn more about debt management vs debt settlement, book a free consultation with an experienced Licensed Insolvency Trustee at Spergel. Our team have been helping Canadians begin fresh financial futures for over thirty years, and we are here to support you too. We will review your financial circumstances and recommend the best pathway for you. Reach out today – you owe it to yourself.

Samantha Galea

Samantha Galea

Samantha Galea is a Chartered Insolvency and Restructuring Professional and LIT (Licensed Insolvency Trustee) who started working with Spergel as a summer student in 2010. With her socio-political background, Samantha is committed to breaking the stigma associated with bankruptcy so that individuals and families can properly understand all of their options on their path to debt freedom. She is also our resident expert on student debt and collection agencies, as well as the manager of our Brampton office. Outside of work, Samantha is an avid reader of historical non-fiction and world traveler.

Schedule a Free Consultation with Samantha Galea (or your local Spergel LIT) by:

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