May 20, 2021
Choosing the best way to get out of your debt requires an understanding of all your options. See some of the most common ways Canadians get out of debt here.
Everyone’s financial situation is unique, and it can feel overwhelming trying to find a solution that will work when faced with financial challenges that seem insurmountable. Choosing the right debt recovery option requires careful consideration. From debt consolidation to bankruptcy, understanding the nuances of these options is crucial for regaining financial stability.
Choosing the right debt relief option is vital for regaining control of your finances and finding a path to long-term financial well-being. Here are five useful debt solutions to explore, along with the risks and benefits of each, so you can make an informed decision.
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Debt consolidation is an option for anyone who has several types of consumer debt that they want to manage more effectively. Having multiple consumer debts often means you have multiple payment dates, lenders, and varying interest rates.
Debt consolidation allows you to roll all your consumer debts into one loan, often with a lower interest rate. This is very handy when dealing with credit card debt where the interest rate is often around 20%.
Debt consolidation is meant to make it easier to keep track of your overall debt level and your payment date, and the lower interest rate means you’ll pay more of your principal and potentially pay your debt down more quickly.
Debt consolidation doesn’t eliminate your debts—it rolls all your debts into one, making it easier to meet your payment obligations. If your overall debt outweighs your income, you’ll want to consider a consumer proposal or bankruptcy.
A debt management plan allows you to come to an agreement with your creditors that reduces your payments. A credit counsellor can assist you with the negotiation with your creditors.
If the negotiation goes well, you will end up with a lower interest rate on your debt. A debt management plan can make it easier for you to pay off your debts, since your interest rates are lower. You make your payment to the credit counselling agency.
However, the plan doesn’t give you the legal protection of other solutions, like a consumer proposal, and you will have to pay back the entirety of your debt.
There are advantages though, a debt management plan will not affect your credit score as badly as a consumer proposal or bankruptcy.
Debt settlement agreements result in you repaying a portion of your debt. In this case, you need to involve a debt settlement company. Over a given number of months, you make payments to the debt settlement company—not your creditors. When your debt settlement company feels there is enough money built up, they then begin the negotiation with your creditors. They’ll try to settle your debts for less than what you owe, offering a lump sum from the holding account to which you’ve been contributing.
The benefit of this option is that if the offer is accepted by your creditors, you’ll be paying back less than you owe. However, debt settlement companies charge you a fee, and there’s no guarantee that your creditors will accept the offer. In the end, they may charge you fees and refer you on to a professional, like a Licensed Insolvency Trustee (LIT), who will work with you on a consumer proposal.
A consumer proposal is one of two options for legal debt forgiveness.
A Licensed Insolvency Trustee will negotiate an agreement between you and your creditors to lower the amount of unsecured debt you owe. Unsecured debt is debt not backed by an asset. Credit cards are one example of unsecured debt.
This process can result in the amount you owe being lowered by up to 80%, and you’ll have up to 5 years to pay.
That makes it easier for you to get out of debt entirely, over time, and your monthly payments will be lower than before.
There are other additional legal protections of a consumer proposal that are beneficial as well. You won’t receive harassing phone calls or threats from creditors, and creditors can’t take legal action against you, like requesting wage garnishments or putting a lien on your home.
A Licensed Insolvency Trustee is the only person who can file a consumer proposal on your behalf.
Filing a consumer proposal results in an R7 credit rating on your credit report. After you have completed your proposal, you can begin working on rebuilding your credit which means using credit carefully and repaying it in full, without missing payments.
You can learn more about the consumer proposal process here.
Personal bankruptcy can alleviate debt problems almost immediately, but it often is a last resort solution.
For example, in the third quarter of 2024 there were 34,588 insolvencies filed by consumers.
Of those, 27,341 (79%) were settled using a consumer proposal. Only in 7,247 (21%) cases was bankruptcy required.
Declaring bankruptcy will eliminate most, if not all, of your unsecured debt. Like a consumer proposal, the bankruptcy process is regulated by the Bankruptcy and Insolvency Act. All parties involved, including you and your creditors, must be treated fairly and honestly. The same protections are in place for bankruptcy as for a consumer proposal.
A first bankruptcy lasts between 9 and 21 months.
Once you file for bankruptcy, you won’t receive creditor calls, your interest is frozen and wage garnishments end. Bankruptcy will result in an R9 rating, which will stay on your credit report for six years after you have been discharged from your bankruptcy. During that time, you can work on rebuilding your credit.
Again, only a Licensed Insolvency Trustee can file a bankruptcy on your behalf.
Having debt that feels unmanageable can be overwhelming. If you feel like you’re having a difficult time making your debt payments each month, or if you feel that your debt is taking too long to pay off entirely, it’s important to understand your debt relief options.
Reach out to a LIT to discuss your debt situation. You might learn that budgeting and debt repayment strategies and tools can help you make a dent in your debt. If your debt still feels overwhelming even after applying do-it-yourself solutions, your LIT will help you determine which formal solution might work best for you. Debt can be stressful, but it doesn’t have to be forever.
Are you trying to find the right debt solution for you? It helps to talk about it with a professional. Schedule a free consultation with a BDO Licensed Insolvency Trustee to explore your debt relief options.
May 20, 2021
Choosing the best way to get out of your debt requires an understanding of all your options. See some of the most common ways Canadians get out of debt here.
