The amount of debt Canadians are carrying is at a record high. Borrowing more is the only way many can cope with the rising cost of living and higher interest rates. Several great strategies are available to help you reduce the amount you owe, but they may not help if you’re too deep in debt. Here, we’ll look at debt relief options to help you eliminate the financial stress that owing too much money can cause.
How to Become Debt-Free
If you owe money but have no problem making payments, you can use many effective approaches to get out of debt. These include increasing your payments, negotiating lower interest rates, or paying off one debt at a time. Financial management and planning will help you choose the right option to accomplish your goal.
Debt relief options will help you if you’re having a hard time making your payments and affording your living expenses because they can lower your payments, reduce the amount you owe or eliminate your debt. These options include debt consolidation, credit counselling, a debt settlement, a Consumer Proposal and filing for Bankruptcy.
Having a plan is the first step towards financial freedom. This podcast talks about how to draft that plan.
Debt relief options
The right choice for you will depend on how much you owe, your credit rating, your income, and your goal for your debt. There are solutions for almost every circumstance, and professional help is available to help you decide.
Debt consolidation
A debt consolidation will combine your existing debts into one loan, giving you only one payment. The rate may be lower than the rates on some of your existing products, or it may not be. In some cases, the interest rate could be higher.
The advantage of a debt consolidation is that you have only one payment to make and manage. You might find streamlining your debt into one payment is all the help you need to pay off what you owe.
The most common ways to consolidate debt are with:
- A loan
- Credit card balance transfer
- Line of credit
- Mortgage
Typically, the lender will do a credit application on your behalf to qualify you for any type of consolidation loan. They can decline the new loan if the payment is too high for your income or your credit rating needs improvement.
One disadvantage of consolidation loans is that you have to adjust your spending. If you continue to spend, you may end up with more debt than you had to begin with.
Credit counselling
Your debt situation may be overwhelming, so getting professional advice can be a game-changer. A credit counsellor can help you develop a monthly budget and explain how interest can affect your debt and credit rating. They might offer a debt management plan to help you repay what you owe.
Your credit counsellor negotiates a debt management plan with your creditors. They contact your creditors, can negotiate your interest rate to zero, and set up one payment for you. You pay the credit counselling agency, which then pays your creditors.
There are four important things to be aware of if you choose to use a credit counsellor.
First, your credit counsellor doesn’t need to be licensed to call themselves a credit counsellor. Many are, but some are not. Researching the counsellor you choose to work with is very important to help ensure you get good advice.
Second, your creditors are not obligated to accept a debt management plan. If they choose to reject it, you’ll be in the same position as you were before you met with a credit counsellor. You’ll then need to find another solution for your debt.
Third, debt relief options that a credit counsellor may give are not legally binding. Creditors may choose to accept them but can still legally pursue you for the money you owe.
Lastly, the counsellor may refer you to a Licensed Insolvency Trustee (LIT) if they can’t resolve your situation. The government licenses LITs in Canada. LITs offer government-approved, permanent, legally binding solutions for your debts. You can save time by contacting an LIT directly. They can help you with credit counselling and permanent solutions to get you out of debt.
Debt settlement
A debt settlement is an agreement you or a debt settlement company negotiates with your creditors. You make a lump sum payment for less than you owe, and, in turn, your creditors write off the remainder of your debt. Lenders do this to recover some of the money you owe.
Like a debt management plan, creditors do not have to accept a settlement, and settlements are not legally binding. Your creditors can still take legal action against you if they choose.
Debt settlement companies may suggest that they can negotiate a settlement for you and get rid of the remainder of your debt. However, there is no guarantee that their services will eliminate it.
Debt settlement companies may call themselves debt experts but are typically unlicensed debt advisors. These companies and individuals often charge high fees, and you might not get the expected result. If they can’t help you, they may refer you to an LIT for an additional fee. You can skip this step and get a free consultation with a LIT by calling or contacting one online.
Consumer Proposal
A Consumer Proposal can reduce your debt by up to 80%, giving you one payment and up to five years to pay it off. A Licensed Insolvency Trustee must file the Consumer Proposal on your behalf. Consumer Proposals allow you to pay off what you owe and keep your assets. They are legally binding. Once filed, it will stop wage garnishments, collection calls and legal action from creditors. After you complete your payments, you’ll be debt-free.
Bankruptcy
Filing for Bankruptcy is another possible debt relief option. If you’re insolvent, owing more than you can pay, Bankruptcy may provide the debt relief you need. As with a Consumer Proposal, a LIT must file for Bankruptcy on your behalf, and it is legally binding. Your creditors must stop collection calls and legal action; they cannot garnish your wages.
When you file for Bankruptcy, you pay fees over nine months to cover the costs associated with the filing if it’s your first Bankruptcy. Once you’ve made your payments, your Bankruptcy is discharged, and you’ll be debt-free.
A common myth about filing for Bankruptcy is that you’ll lose everything you own. In reality, you can keep some of your assets. The rules of the province determine how much you can keep. Your LIT will explain what assets you can retain if you file for Bankruptcy.
Getting Help With Your Debt
Finding the best solution for your debt can be challenging, but you don’t have to deal with it alone. Our Licensed Insolvency Trustees will work with you so you can make the right choice for your circumstances. Call us at 1-888-371-8900 or contact us online at Allan Marshall & Associates for a free consultation. Our experts will help you find the best solution to get back on track financially as soon as possible.
