Exploring the 5 Debt Relief Options in Canada: A Comprehensive Guide
As Canadians, we understand that maintaining financial stability can sometimes be challenging. Amidst fluctuating market conditions and personal circumstances, you may find yourself in a debt situation that feels overwhelming. Hence, it’s important to be aware of the various debt relief options available in Canada. This guide aims to explore these avenues, their benefits, and potential drawbacks, helping you make a well-informed decision.
1. Unraveling Debt Consolidation
Debt consolidation is often considered by individuals who are juggling multiple consumer debts simultaneously. This method streamlines your debts, making them easier to manage by rolling them into one single loan.
How Does It Work?
If you’re dealing with multiple consumer debts, you’re likely grappling with various due dates, lenders, and interest rates. For instance, credit card interest rates can skyrocket up to 20%. A debt consolidation loan can be a game-changer in such situations.
Instead of dealing with multiple debts, you’ll have one loan to focus on, usually with a lower interest rate. This simplifies tracking your total debt and due date. Plus, the reduced interest rate allows you to pay off your principal faster, accelerating your journey towards a debt-free life.
However, it’s crucial to note that debt consolidation doesn’t erase your debts, but restructures them into a single payment. If your debt is significantly larger than your income, you may need to explore other avenues, like a consumer proposal or bankruptcy.
2. Deciphering Debt Management
A debt management plan is another tool for Canadians looking to reduce their debt payments. It involves negotiating with your creditors to lower your interest rates, making debt repayment more achievable.
What Does It Entail?
In a debt management plan, a credit counsellor negotiates with your creditors on your behalf. If successful, you’ll end up with a lower interest rate on your debt, making your payments more manageable. You’ll pay the agency, not the creditors, simplifying the process.
However, it’s important to note that a debt management plan lacks the legal protection that other solutions offer, like a consumer proposal. It also requires you to pay back the entirety of your debt. To understand more about this choice, visit /solutions/debt-counselling/debt-management-and-relief-options.
3. Delving into Debt Settlement
A different approach to debt relief in Canada is through debt settlement. This option involves repaying a portion of your debt with the help of a debt settlement company.
How Does It Function?
In a debt settlement process, you make payments to the debt settlement company over a period of months. Once they believe there’s enough money accumulated, they start negotiating with your creditors. Their goal is to settle your debts for less than you owe, proposing a lump sum from the account you’ve been contributing to.
One advantage of this approach is that, if your creditors accept the offer, you’ll be paying back less than you owe. However, the company will charge you a fee, and there’s no certainty that your creditors will accept the offer. In such cases, they might refer you to a professional like a Licensed Insolvency Trustee (LIT) who can guide you through a consumer proposal.
4. Understanding Consumer Proposal
A consumer proposal represents a method of legal debt forgiveness. An LIT negotiates an agreement with your creditors, enabling you to repay only a portion of your total debt over a maximum of five years.
What Are Its Benefits?
A consumer proposal can significantly help you get out of debt over time. Your monthly payments will be lower, and you’ll receive additional legal protections. For instance, you’ll be safe from harassing calls or threats from creditors, and they can’t take legal action against you, such as wage garnishments or putting a lien on your home.
However, filing a consumer proposal will lead to an R7 credit rating on your report. After completing your proposal, you can start rebuilding your credit by using credit cautiously and making full repayments without missing any payments. Learn more about the consumer proposal process here.
5. Discussing Bankruptcy
Bankruptcy is a last-resort option that can provide immediate relief from debt problems. Declaring bankruptcy eliminates most, if not all, of your unsecured debt.
What Does Bankruptcy Entail?
Like a consumer proposal, the bankruptcy process is regulated by the Bankruptcy and Insolvency Act. All parties, including you and your creditors, must act fairly and honestly. The protections are the same as for a consumer proposal. Once you file for bankruptcy, you won’t receive creditor calls, your interest is frozen, and wage garnishments end.
However, bankruptcy will result in an R9 rating, which will stay on your report for six years after you’ve been discharged. During this time, you can work on rebuilding your credit.
Navigating Debt Relief
Dealing with unmanageable debt can be daunting. If you’re struggling with monthly debt repayments or if it’s taking too long to pay off your debt completely, understanding your debt relief options is crucial.
Reach out to an LIT to discuss your debt situation. You might find that budgeting and debt repayment strategies and tools can help you decrease your debt. If your debt still feels overwhelming even after applying do-it-yourself solutions, your LIT will assist you in determining which formal solution might work best for you. Remember, debt can be stressful, but it doesn’t have to be forever.
If you’re seeking the right debt solution, it’s beneficial to consult a professional. Schedule a free consultation with a BankruptcyCanada Licensed Insolvency Trustee to explore the 5 debt relief options in Canada.
