Many Canadians carry more debt than they can handle, which can be overwhelming and stressful. However, there is a ray of hope. Several debt options exist to provide relief and avoid Bankruptcy. These solutions can help you take control of your financial future.
Debt Solutions
Canadians are facing a growing challenge in paying their debts. The consumer insolvency rate in Canada saw a significant 11.4% increase from December 31, 2023, to December 31, 2024. During the same period, Consumer Proposals rose by 11.6%, and consumer Bankruptcy filings increased by 10.8%. These numbers underscore the urgency of the situation.
Insolvency means you don’t have enough money coming in to pay your debts and cover your living expenses. There are several options to consider if you’re in this situation. However, if you’re receiving collection calls or your creditors have threatened you with legal action, you may need professional help to deal with your debt. Professional help can provide reassurance and support in your journey to financial stability.
Defining your long-term financial goals is crucial before starting a strategy to tackle your debt. This step is not just important; it’s empowering. It puts you in the driver’s seat of your financial future. Starting with your goals is essential because each debt option has pros and cons. Here are some questions to consider:
- What’s the underlying issue causing my debt problems? Is it a lack of income, poor budgeting, high interest rates or something else?
- Will a payment plan be enough to get out of debt, or do I need to reduce my debt?
- Am I comfortable cashing out investments or selling assets?
- Is maintaining a good credit rating a priority for me?
- Do I need to put a stop to collection activity and legal action from creditors?
Once you decide on your ultimate goals, you can explore several strategies to reduce your debt or make your payments manageable.
How to avoid Bankruptcy
Your financial situation is unique to you. Understanding where you are financially and where you want to be will help you choose the best course of action. Managing debt is difficult, regardless of how you decide to handle it. Five common strategies that can help are:
1. Cash-out investments or sell assets. Doing either can bring immediate relief and reduce or eliminate what you owe. Once debt-free, you won’t need to worry about interest costs or making payments.
The disadvantages of cashing out investments or selling assets are:
- You may not have enough to eliminate your debt.
- Your investments could be locked in, so you can’t access them until they mature.
- There may be tax implications or potential losses if you liquidate your investments.
- You might need your assets like your car or home
2. Get a debt consolidation loan. These loans can pay off some or all of your debt. They may offer a lower interest rate than your existing credit and provide one fixed payment. A debt consolidation loan can be unsecured or secured by an asset. It can also be a second mortgage or Home Equity Line of Credit. Once you make all your payments, your loan is paid off.
Not all borrowers qualify to consolidate their debt because before getting the loan, you typically need to:
- Apply for credit.
- Prove your income and employment.
- Have enough income to make the payments.
- Have a good credit rating.
3. Work with a credit counsellor. Many credit counsellors work for non-profit agencies. Their services often help borrowers understand how debt works, the cost of borrowing, and how to budget. They offer debt management plans (DMPs) for borrowers who need to restructure their debt. The purpose of a DMP is to reduce the interest rate on your debt, sometimes to zero, and give you one payment to pay off all your debt.
A DMP can work well for some borrowers, but there are several things to be aware of:
- Credit counsellors don’t have to be licensed.
- DMPs do not reduce the amount you owe, and you could pay more if you extend your payment period to five years.
- Creditors are not required to accept a DMP.
- DMPs are not legally binding.
- Participating in a DMP will affect your credit rating.
4. You can offer creditors a debt settlement. A debt settlement involves offering creditors a lump sum for less than the amount owed, allowing you to settle the debt. They agree to take an immediate payment and write off the rest. You can try to arrange this yourself or hire a debt settlement company.
A debt settlement may work for some people, but it’s not a great option because:
- They have to negotiate with each creditor.
- Creditors are not required to accept a settlement.
- Debt settlements are not legally binding.
- You need to have the money to make a lump sum payment.
- If you hire a company, you’ll pay fees without guaranteeing results.
5. File a Consumer Proposal. A Consumer Proposal can reduce your unsecured debt by up to 80% and allow up to five years for you to repay the remaining balance. Consumer Proposals are legally binding, so your creditors can no longer pursue you to collect your debt. Once filed, they stop all interest and fees as well. This is becoming the #1 alternative to filing for Bankruptcy.
They are regulated by the Office of the Superintendent of Bankruptcy, and a Licensed Insolvency Trustee will prepare and file the Proposal on your behalf. Borrowers use Consumer Proposals as a Bankruptcy alternative because:
- It reduces your debt, but you must still repay some of it.
- You have up to 60 months to repay it, which is longer than payments for Bankruptcy.
- You keep all your assets, including tax refunds and GST rebates.
- You don’t have to report your income to your LIT each month.
Some disadvantages to a Consumer Proposal are:
- The majority of your creditors have to vote to accept it.
- You still have to make a monthly payment.
- It affects your credit rating.
Where to get Debt Help
Managing debt is critical to reducing stress and building a solid financial future. Depending on your debt and what you want to accomplish, there are several ways to do this. Expert advice from licensed professionals will help ensure you’re on the right path.
Our Licensed Insolvency Trustees at Allan Marshall and Associates have been helping people with financial difficulties for over thirty years. We assist clients with credit counselling, Consumer Proposals, and filing for personal Bankruptcy. Contact us online or by calling 1-888-371-8900 for a free consultation. We’ll help you put your debt behind you.
