It now costs more to have debt. The Bank of Canada raised interest rates, which means your monthly loan and mortgage amount is far higher. And with the high cost of living, the budget squeezes. Many people owe more than they can possibly repay.
Fortunately, there are debt relief options available. Debt settlement in Canada is a viable way to reduce the amount you owe. Let’s explore how debt negotiation works, so you can lower your outstanding balance, payments, and interest.
Debt Negotiation In Canada
A debt settlement is an agreement between you and your creditors to reduce the amount you owe. If your creditors accept a debt settlement, they will take a portion of what you owe and write off the leftover balance. Upon agreement, they get back some of their money (rather than none of it).
There are three ways to settle your debt:
- A debt negotiation plan: You arrange a new debt settlement either on your own or through a debt settlement company.
- A debt management plan (DMP): You enroll in a debt management plan using a credit counselling agency.
- A Consumer Proposal: You require the services of a Licensed Insolvency Trustee (LIT) to request debt relief on your behalf.
Each debt relief method requires you to meet with the creditor or creditors and agree on a settlement. You can work with your creditors, but debt negotiation in Canada is typically more effective when you use the services of a professional (e.g. credit counsellors, debt settlement companies, or Licensed Insolvency Trustees).
Let’s look into each settlement option with more depth and detail.
Debt negotiation plan
A debt settlement plan is an agreement between you and your creditor(s) to pay less than the amount you owe. The creditors write off the remaining amount of the debt if they receive a part of your outstanding balance.
A debt settlement requires a lump sum payment to settle your debt. You must have the money available to pay the agreed-upon amount.
You can initiate debt negotiations with the companies you owe. Direct communication generally works when you have only one or two accounts to settle, which are at least 90-120 days overdue. If you know how debt negotiation works and are comfortable with the process, you could take this approach.
If you have a lot of debt, you may want help from a debt settlement company. A debt settlement company negotiates a settlement for you. These companies will deal with your creditors to try and come up with an acceptable solution. It is a better approach if you feel uncomfortable and have numerous accounts you want to settle.
A debt settlement company sounds good in theory, but there are some harsh realities to consider:
- Rejection: Creditors don’t have to negotiate with a debt settlement company.
- Risk: Debt settlements are not legally binding.
- Pressure: You will have to make payments to an account with the debt settlement company until you have enough money to pay off the agreed amount.
- Term: debt settlement can take years if you don’t have the money available.
- Cost: These companies often charge high fees.
- Liability: The interest and fees on your debt continue until you pay it off.
Although there are drawbacks, some debtors experience success with debt settlement companies. If you decide to work with one of these companies, do your research and see if they have any complaints with the Better Business Bureau.
And be sure to confirm how much the company charges and when they expect the settlement to complete. Some settlement organizations charge very high fees—you may pay more than if you paid your debts in full from the start.
Debt management plan
A debt management plan is a tailored debt relief strategy between you and your creditors.
While that might sound just like a debt settlement plan, they are very different from one another.
The biggest difference is that a debt management plan typically doesn’t reduce the amount you owe. Instead, the goal of a DMP is to eliminate or reduce your interest charges. Interest on some unsecured debt can be 20% or more, so eliminating or reducing it can be a big help.
Debt management plans are put in place with the help of a credit counselling agency. You can’t set up a DMP with your creditors on your own.
While these plans are a type of debt consolidation, they’re not a debt consolidation loan. They combine your eligible unsecured debt into one payment. You make your payment to the credit counselling agency, which distributes it to your creditors based on the terms of the agreement.
Depending on your situation and goals, a debt management plan could be a good choice. However, a DMP does have several pros and cons to look out for:
Pros
- Reduced interest rates: Some plans can go as low as zero percent.
- Simplicity: You make only one monthly payment.
- Speed: You’ll be debt-free in five years or less.
Cons
- Rejection: Creditors do not have to accept the terms.
- Risk: The agreement is not legally binding on your creditors and may not stop legal action.
- Cost: There may be fees for setting up the plan.
- Complexity: You can’t include all debts in a debt management plan.
- Lack of access: You must have enough income to make the payments.
To set up a debt management plan, contact a credit counselling agency. They will review your financial situation. And determine if your situation will benefit from a DMP. If deemed useful, they will put a plan together and contact your creditors.
Before meeting with a credit counselling agency, it’s wise to:
- Ensure they have a good reputation by checking their status with a national or provincial agency.
- Review any complaints against them with the Better Business Bureau.
- Understand the costs involved with the DMP.
Consumer Proposals
Consumer Proposals are similar to DMPs and debt settlements but have additional advantages. First, a Consumer Proposal can reduce your debt by up to 80%. Second, You repay the remaining amount in monthly instalments to your Licensed Insolvency Trustee, not your creditors or an unknown settlement company. Third, your LIT will also do the hard work and distribute the amounts to your creditors. Lastly, you can have up to five years to pay off a Consumer Proposal.
There are some key differences between Consumer Proposals and other debt-relief options:
- Federal regulation: Licensed Insolvency Trustees are regulated and licensed by Canada, contrary to credit counsellors and debt settlement companies.
- Risk: Consumer Proposals are legally binding.
- Collection requests: Once filed, a Consumer Proposal will stop all legal activity, collection calls, and wage garnishment.
- Comfort: Your LIT implements the proposal if the majority of your creditors vote to accept it.
- Cost: Interest and fees on the debt will stop.
- Simplicity: Your fees are part of your monthly payment.
Note that you cannot negotiate a Consumer Proposal yourself. It must be put in place by a Licensed Insolvency Trustee. Your LIT will work with you to develop a reasonable payment. Typically, the amount you owe is reduced. Your creditors will not pursue you for additional payments, and you won’t have to make large lump sum payments to settle your debt.
The chart below summarises the main differences between each debt settlement plan.
| Type of debt negotiation in Canada | Debt settlement | Debt management | Consumer Proposal |
| Who arranges it with creditors? | You or a debt settlement company | A credit counselling agency | A Licensed Insolvency Trustee |
| Interest reductions | No | Yes, in most cases | Yes |
| Reduces the amount you owe | If creditors agree to accept a lesser amount | No | It can reduce your debt by up to 80% |
| Legally binding | No | No | Yes |
| Time to pay off debt | It can take years until you have the money or your debt settlement company can negotiate an acceptable agreement | 36-60 months | Up to 60 months |
| Fees | Yes, and you may have to pay them whether they are successful or not | Typically, a set-up fee and administration fee are included in your payment | No upfront fee-fees are included in your payment |
| Proceedings are government-regulated? | No | No | Yes |
| Debts consolidated into one payment | No | Yes | Yes |
| Includes Canada Revenue Agency debt? | No | No | Yes |
Debt negotiation in Canada
If you’re overwhelmed by debt, there are several avenues for debt negotiation in Canada. Each option has its pros and cons. A thorough understanding of the process (e.g. how to choose the right expert, the costs and limitations of each debt settlement plan, etc) will help you decide which route to take. A permanent, manageable solution will help reduce stress and get your finances back on track.
Get Help With Your Debt
Knowing where to turn for the right advice can be challenging. At Allan Marshall and Associates, we’ve been helping clients for over 40 years. Our Licensed Insolvency Trustees will provide you with expert advice and present legally binding, government-regulated solutions for the money you owe. Call us today at 1-888-371-8900 or use our online form to contact us for a free consultation. We look forward to helping you settle your debt and rebuild your finances.
