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Exploring Debt Relief Options in Canada: Debt Settlement, Consumer Proposal, and Credit Counselling

Dealing with debt is a common challenge, but in Canada, there are different paths you can take to help ease the burden. This article breaks down three key options – Debt Settlement, Consumer Proposal, and Credit Counselling – in simple language. By understanding these choices, you can make informed decisions to regain control of your financial health.

Debt Settlement: Finding Middle Ground with Creditors

Debt Settlement is like finding a middle ground between you and the people you owe money to. It’s a process where you or a third-party negotiator talk to your creditors and try to work out a deal. The goal is to agree on paying back a portion of your debt, less than what you originally owed (so you get partial debt forgiveness).

The objective of a Debt Settlement is that it results in you paying less overall. It’s like saying, “I can’t pay the full amount, but what if I pay this much, and we call it even?” If your creditors agree, you could end up with a more manageable debt load.

However, Debt Settlement comes with a few important points to consider. First, it can affect your credit score because you’re not paying back the full amount you owe. Second, it requires good negotiation skills, so if you’re not comfortable talking to your creditors, you might need a professional to help you out.

Consumer Proposal: Making a Formal Agreement

A Consumer Proposal is more formal. It involves making a legal agreement with your creditors, and it’s facilitated by a Licensed Insolvency Trustee (LIT). This agreement outlines a plan for you to repay your debts, usually with reduced amounts and more time to pay.

One of the significant perks of a Consumer Proposal is that it puts a shield around you. Once it’s in place, your creditors (or the collection agency hired by your creditors) can’t take any legal actions against you. They can’t harass you and they can’t touch your wages or belongings. It’s like a timeout that gives you space to work on your finances without extra stress.

Another benefit of a Consumer Proposal is that you only repay a portion of your debt as agreed upon with your Trustee. It’s not uncommon to see debts reduced by as much as 70% of the original amount owed.

But not everyone qualifies for a Consumer Proposal. There are three conditions to meet: 

  1. you must be a Canadian citizen
  2. you must be insolvent (unable to pay your debts), and 
  3. your debt is over $1,000 but not more than $250,000. 

Consulting with a Licensed Insolvency Trustee will let you know if this option is a good fit for you.

Credit Counselling: Learning How to Handle Money Wisely

Now, let’s talk about Credit Counselling. This is like getting a coach to help you handle your money better. 

Credit Counselling teaches you how to make a budget, using credit and debit cards wisely, and paying off debts. Licensed Insolvency Trustees are expert Credit Counsellors. They can give advice on budgeting or if necessary, explain other solutions like a Consumer Proposal or Bankruptcy

Signs that you might need Credit Counselling include having more debt than income. During counselling, Trustees will look at your finances and talk about goals like spending less on unnecessary things, paying off debts with high interest rates, and selling things you don’t really need.

They can also advise you about taking on a debt consolidation loan from a bank. Debt consolidation (also known as credit consolidation) combines all your debts into one payment, so you only have to make a single monthly payment that fits your budget instead of dealing with multiple bills.

Unlike some credit counselling companies that may charge fees and have limited ways to help with debt, Licensed Insolvency Trustees follow strict rules outlined by the federal government. They do not charge for consultations and offer many options to get out of debt. Good credit counselling focuses on changing how you manage money. It doesn’t promise to solve all your money problems quickly. Instead, it helps you make lasting changes for a better financial future.

Choosing Between Options

So, how do you decide between Debt Settlement, Consumer Proposal, and Credit Counselling? It depends on your situation.

If you’re looking for a middle ground and want to pay back less, Debt Settlement might be your thing. Just remember, it can impact your credit score.

If you need a formal plan and want protection from creditors, a Consumer Proposal might be right for you. It’s like making a deal that shields you from legal actions while giving you a clear path to becoming debt-free.

But if your debts are more manageable, and you want to learn how to handle your money better, Credit Counselling may be all that you need.  It’s like getting a mentor to guide you towards making smarter financial choices.

Thinking about your long-term goals, how much debt you have, and your ability to make payments will help you decide which debt relief option is right for you. If you’re unsure, talking to a Licensed Insolvency Trustee can provide guidance.

Impact on your credit score

Now, let’s talk about something important: your credit score. Both Consumer Proposals and Debt Settlement can affect it, but Credit Counselling has a different impact.

If you file a Consumer Proposal, it stays on your credit report for up to three years after you finish it. During this time, it might be a bit tough to get new credit. But if you stick to your plan and make payments, your credit will slowly improve.

Debt Settlement can also impact your credit score because you’re not paying back the full amount you owe. It’s like a compromise with your creditors, so they may report it to credit bureaus.

Credit Counselling will not directly hit your credit score, but it could mean closing some credit accounts. This can impact your credit score, but usually not as much as a Consumer Proposal or Debt Settlement. It’s like a small bump instead of a big one.

Allan Marshall & Associates – Licensed Insolvency Trustee

Since 1979, Allan Marshall & Associates has been assisting individuals and families facing financial difficulties. As Licensed Insolvency Trustees regulated by the Canadian Federal Government, we thoroughly assess your options to find the best solution for addressing your debt issues. Contact us today for a free consultation.

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Amanda Sherwood

Amanda started with Allan Marshall & Associates Inc as an Estate Manager in 2008 where she learned and gained valuable knowledge about the industry. In 2022, Amanda received her Chartered Insolvency & Restructuring Professional (CIRP) designation and attained her license as a Licensed Insolvency Trustee (LIT)