The Ultimate Guide to Comparing Debt Solutions
When it comes to managing debt, there are numerous avenues you can explore. In this article, we will examine and compare debt solutions that can aid you in regaining control over your financial health. We will delve into three main options: Debt Management Plan (DMP), Consumer Proposal, and Bankruptcy. Understanding these choices will equip you with the necessary knowledge to make an informed decision about your financial future.
Debt Management Plan (DMP)
A DMP is a voluntary agreement that you can enter into with one or more of your creditors. The key components of this plan involve interest relief and a structured payment schedule.
The Difference
In a DMP, you make an agreement with your creditors to pay off your debts over a certain period. This is often accompanied by interest relief, making the repayment process more manageable.
Access
To access DMP services, you are advised to consult a provincially regulated credit counselling agency or a credit counsellor. A Licenced Insolvency Trustee (LIT) can help you review your options and guide you to a reputable credit counsellor.
Obligations
Once your creditors accept the terms of your DMP, you make regular payments to the credit counselling agency. They then distribute your payments to your creditors as per the DMP agreement.
Debt Repayment
In a DMP, you are required to repay the full debt. However, this can sometimes be done without incurring any interest.
Cost
The fees associated with this service are not regulated, and they can vary depending on the financial professional you engage. It’s essential to ask for clear information about fees and services beforehand.
Impact on Credit Score
Your credit report will indicate that you have made payment arrangements with a credit counselor for two years after you complete your DMP. However, your credit score can be rebuilt over time by maintaining good financial habits.
Credit Cards
You can only retain credit cards that are not included in your DMP. Any credit card that is part of the DMP must be closed and cancelled.
Income
You will be responsible for managing your income and making the agreed payments to the credit counsellor.
Duration
A DMP typically lasts between one to five years.
Consumer Proposal
A consumer proposal is a legal process aimed at helping honest but unfortunate debtors relieve their debts. It involves making an offer to your creditors to pay all or a portion of your debts over a specific period.
The Difference
A consumer proposal is a legally binding process where you offer to pay your creditors a percentage of what you owe them over a specified period.
Access
Licensed Insolvency Trustees (LITs) are the only professionals permitted to offer this service. An LIT will review all your options with you.
Obligations
You must make periodic or lump sum payments to the LIT and comply with any other conditions in the proposal. You are also required to attend two financial counselling sessions.
Debt Repayment
With a consumer proposal, you typically pay back a percentage of your debt.
Cost
The fees for submitting a consumer proposal are regulated by the Bankruptcy and Insolvency Act. Your payments to the LIT will be used to pay fees related to your consumer proposal and your creditors.
Impact on Credit Score
The Office of the Superintendent of Bankruptcy reports all consumer proposal filings to Canada’s credit reporting agencies and when your obligations have been fully performed.
Credit Cards
During your consumer proposal, your credit cards with a balance will be cancelled. You may keep credit cards that have no balance owing at the time of filing.
Income
You will be responsible for managing your income and for making either the agreed lump sum or periodic payments to the LIT.
Duration
A consumer proposal can last up to a maximum of 5 years.
Bankruptcy
Bankruptcy is another legal process designed to help honest but unfortunate debtors get rid of their debts.
The Difference
In bankruptcy, your assets will be used to pay off your debts. At the end of the process, you are legally released from the debts you had when the bankruptcy was filed.
Access
Similar to a consumer proposal, Licensed Insolvency Trustees (LITs) are the only professionals permitted to offer this service. An LIT will review all your options with you.
Obligations
In bankruptcy, some of your assets might need to be turned over to a Licensed Insolvency Trustee (LIT), who will then use those assets to satisfy your outstanding debts.
Debt Repayment
What you pay is based on the value of your assets and your ability to make surplus income payments.
Cost
The fees to file for bankruptcy are regulated by the Bankruptcy and Insolvency Act.
Impact on Credit Score
The Office of the Superintendent of Bankruptcy reports all bankruptcy filings to Canada’s credit reporting agencies and reports when you have been discharged.
Credit Cards
In a bankruptcy, you are required to surrender all credit cards that have been issued to you for cancellation.
Income
Depending on your income and the number of people in your household, you may have to make monthly payments to your LIT as surplus income payments.
Duration
The duration of bankruptcy varies based on several factors. It can be as short as 9 months for a first bankruptcy with no surplus income payment obligations, or up to 36 months for a second bankruptcy with surplus income payment obligations.
In conclusion, it’s essential to compare debt solutions before deciding on the one that suits you best. Regardless of the option you choose, the goal is to regain control over your financial health and move towards a debt-free life.
