Debt Relief Options in Canada - Which Debt Relief Option is Right For Me?
Canadian consumers can find themselves in serious financial difficulties for many different reasons.
You might find that you have trouble making your mortgage payment on time, or you might be having trouble making the minimum payments on your credit cards.
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There are quite a few different debt relief options that a consumer, stuck in debt, can take advantage of, although there are likely only a maximum of 2 or 3 of these debt relief options that would fit your debt relief needs.
Many Canadian consumers are unaware of their rights and all of the options that are available to them.
Consequently, they often make poor decisions about getting out of debt.
Understanding the advantages and disadvantages of each debt relief solution can help you make the right decision about dealing with your debt and can save you thousands, if not tens of thousands of dollars.
How Can I Choose the Best Debt Relief Option for My Situation?
To answer the question of what is the best debt relief option for you, you must answer some questions:
- What are the debt relief options available to consumers in Canada?
- Am I disqualified for any of the debt relief options?
- What do my debts look like?
- What debt relief options fit my debts and financial situation?
- Are there disadvantages of the debt relief options available to me?
- What are the advantages of the debt relief options available to me?
- What is the best debt relief option for my debt situation?
Debt Relief Options -What are the Debt Relief Options Available to Canadian Unsecured Consumers?
- Borrowing money (only do this if you are responsible enough to manage taking on further debt);
- Raising money by selling assets;
- Debt settlement – either through a professional or by yourself;
- Credit counselling;
- Do nothing and wait for the limitation period on debt in your province to expire (you will likely get sued);
- Consumer Proposal;
- Personal Bankruptcy.
Further Explanation of Debt Relief Options in Canada
In this section of the article we will explore each of the debt relief options available.
Some of these debt relief options are minor, while some are more severe with more consequences.
For example, filing personal bankruptcy can eliminate all of your debt but you will have a record of a bankruptcy on your credit report for 7 years (although you can qualify for a mortgage within 2 years of being discharged from bankruptcy).
Some of these debt relief options can be used at the same time.
You might also be able to start out with one debt relief method, and then change to a different method in the future if you find your original choice is not working for you.
For example, it is possible to file personal bankruptcy after you have made a consumer proposal if you find out that the proposal payments are too much for you to make.
You can also take advantage of time passing to increase your debt relief options.
Consumers that do not make a payment on their unsecured debt for a certain period of time – either 2 or 6 years, depending on your province – can take advantage of the expiry of the limitation period in their province to avoid paying an unsecured debt altogether.
Here we will examine each of the debt relief options available to unsecured Canadian consumers in more detail.
Debt Relief Options Available to Canadians:
Borrowing Money: Borrowing more money must be done only if you have the ability to properly manage more debt without getting deeper into debt.
In many circumstances, consumers that borrow more money to pay off their consumer debt, only end up digging a deeper financial hole.
In certain circumstances it might be possible for a consumer to pay off their debt by borrowing money in an inexpensive manner.
For example, you could borrow money from your family or a friend or you can take out a mortgage on your real property.
Selling Assets to Raise Funds: If you can resolve some, or even all, of your high interest unsecured debt by selling some of your assets, you should consider this as you can save thousands of dollars in interest charges.
If you have a second car, a snowmobile, motorcycle, boat or other high value asset you can raise funds quickly.
You can also sell your main car and get a less expensive vehicle as a way to raise funds to pay down your outstanding debts.
If you have real property that you can sell, there are two benefits to doing so.
The first benefit is obvious – you will have money in hand that you can use to pay off your high interest unsecured debts, or you can use the funds to make a debt settlement.
The second benefit to selling your real property, is that if you don’t have real property your creditors are less likely to sue you for collection on unpaid debts.
Most creditors will only sue debtors that own real property, so the creditor can get a lien on the property, which means they will recover their monies when the property is sold or refinanced.
If you have RRSPs you should not cash them in to pay down your debt.
When you cash in your RRSP you will have to pay income taxes.
Also, you can keep your RRSPs if you were to go bankrupt (less any contributions made in the 12 months prior to bankruptcy).
Debt Settlement: A debt settlement agreement allows you to make an agreement to pay down your debt.
You can pay down all of your debt but over a longer period of time, or you can make an agreement to settle your debts for less than you owe.
Your creditors are more likely to accept a debt settlement agreement if the limitation period is close to expiring.
When you settle your debts you can hire the assistance of a professional company or you can attempt to settle your debts on your own.
Credit Counselling: Credit counselling gives an unsecured consumer a chance to lower their monthly payments by increasing the time they have to pay the debt back.
If you sign up for credit counselling, you will enter into a debt management plan with an agency that provides credit counselling.
All of your unsecured debt will be included in the debt management plan.
With credit counselling through a debt repayment plan, you will repay 100% of your debt to the agency that provided the debt management plan.
You will make monthly payments to the credit counselling agency for a period not exceeding 60 months (5 years).
If you decide to deal with your debt through a credit counselling debt management plan, your credit counselling agency will charge a fee to enroll you in the debt management plan.
The fee is usually equal to 5 to 15% of the consumer’s monthly payments in the debt management plan.
Do Nothing: A consumer can choose, either by plan, or through circumstances, not to pay on one or more of their unsecured debts.
By postponing any decision on which debt method you might like to choose in the future, you might have much to gain, and nothing to lose.
If you do not pay on your unsecured debt, your creditors might choose to sue you, although if you do not own real property, this is less likely.
If you do not own any assets waiting to take advantage of the debt limitation periods means you might not have to pay a penny to some, or all, of your unsecured creditors.
Additionally, if you do nothing you can also re-evaluate your financial situation in the near future.
If you have gotten a raise, inherited money or real property, or have otherwise improved your financial situation you might be able to repay all of your outstanding debt on your own.
Conversely, you might find your financial situation worse, in which case you might want to choose a consumer proposal or even personal bankruptcy.
Debt Relief Options – Consumer Proposal: A Licensed Insolvency Trustee can help a consumer debtor file a consumer proposal with their creditors, which is an agreement to repay a portion of the debt that you owe.
Under a consumer proposal, the consumer, through the LIT, will make a proposal to their unsecured creditors to repay about 35% of their debt over a period of time usually lasting from 3 to 5 years.
A consumer proposal includes all unsecured debt, including tax debt, although it doesn’t eliminate child support payments, alimony payments, and certain other unsecured debt.
A consumer can also make a lump sum payment offer in a consumer proposal.
Once you have submitted your consumer proposal you will immediately stop paying your unsecured creditors.
Once your proposal has been submitted, the creditors have a right to vote on whether to accept the consumer proposal or reject it within 45 days.
However, almost all consumer proposals are accepted as the Trustee has experience making attractive proposals, and the unsecured creditors will receive more monies than if you were to go bankrupt. If the creditors do not vote, or they vote to accept the proposal, the proposal will be accepted.
Once the consumer proposal is accepted, the proposal is filed with the Office of the Superintendent of Bankruptcy and all collection attempts and wage garnishments will stop by law.
During the consumer proposal you must make monthly payments.
Do not fall behind by three payments, as this will cause your proposal to be cancelled. If your proposal is annulled, you might have no choice but to file personal bankruptcy.
Secured debts are not included in a consumer proposal, and you must continue paying your secured debts as agreed.
Debt Relief Options – Personal Bankruptcy: Filing bankruptcy allows a debtor to get a quick and easy fresh financial start, usually within only 9 months. Another major benefit of bankruptcy is you can eliminate all of your unsecured debts (with certain exceptions, such as child support or alimony payments).
In order to file personal bankruptcy, you need to use the services of a Licensed Insolvency Trustee (formerly a bankruptcy trustee), as only a LIT can file bankruptcy with the Office of the Superintendent of Bankruptcy.
The first step in going bankrupt is to meet with a Trustee for a free evaluation of your situation.
When you go bankrupt, all of your eligible debts will be discharged.
The bankruptcy exemptions in your province lists which assets a person is able to keep when going bankrupt.
Most debtors filing bankruptcy keep all of their assets.
In many cases you will receive your discharge from bankruptcy in 9 months.
If you have surplus income payment requirements, however, your bankruptcy will be extended to 21 months.
If you are filing for bankruptcy for a second or third time, the length of your bankruptcy will be increased by a further amount of time.
Child support and spousal support payments, student loans if you haven’t been out of school for at least 7 years, court fines, and debts arising from fraud cannot be discharged in bankruptcy, although your other unsecured debts will be eliminated in full when you are discharged from bankruptcy.
You cannot discharge your secured debt in a bankruptcy, although you are allowed to keep your assets with secured debt attached to them if you can keep up the payments as agreed.
How Does my Debt Look?
Before you can make an informed decision about what debt relief option is best for you, you need to know what your debt looks like. This is known as your debt profile.
Your debt profile is the type of debt you owe – either secured or unsecured, which can be consumer and non-consumer debt – and the amount of debt you have in each category.
You can also have non-dischargeable debt, which can only be eliminated when you make payment in full. Non-Dischargeable debt includes child support, alimony and court fine payments.
You cannot eliminate these debts in bankruptcy, a consumer proposal, or any other debt relief option.
Secured debt, which is commonly a mortgage and car loan, is a debt where the creditor has special security in the asset.
In the event that you do not pay, your secured creditors have the right to seize the asset that secures the loan. Secured debt cannot be eliminated in bankruptcy, a consumer proposal or through credit counselling.
The only way you can deal with secured debt is to sell your assets or borrow money.
We recommend that you list out all of the debt that you have and categorize each debt you have to create a picture of how your debt looks.
Canadian consumers with unsecured debt are in a better position to receive debt relief than those consumers with secured debt, or non-dischargeable debt.
From the perspective of a debtor, unsecured debt is the best kind of debt.
Are All Debt Relief Options Available to Me?
While you might be eligible for several debt relief options in theory, in all likelihood, only 1 or 2 of the debt relief options explored here are available to the average Canadian consumer with debt.
Before you can choose a debt relief option certain conditions must be met.
Credit Counselling: A consumer without significant assets who would like to make a debt management plan to lower their monthly payment and increase the time to pay their debt would be a good candidate for a debt management plan through credit counselling.
Debt Settlement: A consumer who has not paid on their unsecured debt for some months will find a debt settlement possible.
Generally, your creditors will not accept any settlements unless a debt is 6 months or older.
Your creditors are under no obligation to accept a settlement for less than a full amount of what you owe, although they will be more likely to entertain such a settlement if the limitation period is close to expiring.
Consumer Proposal: A consumer proposal is an attractive debt relief option for consumers with a steady income and some assets that they would like to keep.
A consumer proposal is not available if your unsecured debt is less than $10,000 or more than $250,000 (excluding your mortgage, which must be included in this calculation, but won’t be discharged in the proposal).
The $250,000 limit can be increased to $500,000 for debtors that are filing a joint consumer proposal.
Bankruptcy: A consumer must be insolvent in order to go bankrupt under the Bankruptcy and Insolvency Act. To be insolvent means you must owe at least $1,000, have debts greater than your assets and be unable to repay your debts on time.
Some individuals who wish to file bankruptcy find that they cannot because they do not meet the definition of insolvent, although this is rare. Almost all debtors struggling with their finances enough to consider bankruptcy are insolvent.
What are the Advantages of the Debt Relief Options?
Selling Assets: Selling assets can be a hard decision, but it could be a wise choice if it can allow you to pay off high interest debt in full. High-interest debt like credit card debt can cost you thousands of dollars in interest charges over time.
Another benefit to selling real property assets, such as your home or a second rental property, is it could prevent your creditors from suing you. Creditors generally sue debtors with outstanding debt that have real property.
Borrowing Money to Repay Debt: If you can borrow money from family or friends this could allow you to pay down your outstanding debt quickly.
This method should only be undertaken if you are responsible with your borrowing.
You do not want to take on more debt if you are going to dig yourself a bigger financial hole.
Credit Counselling: In some cases a creditor will be able to pay less than the full amount that they owe to their unsecured creditors with a debt management plan provided by a credit counsellor, but generally, the advantage of credit counselling is it allows a consumer to lower their monthly payments by extending the time they have to repay their debt.
Debt Settlement: If you have not been sued by your unsecured creditors, you can have a large amount of flexibility in making a debt settlement agreement with your unsecured creditors.
A consumer can stop making payments on certain unsecured debts but not others, giving them access to credit, while also allowing them to settle their debt at a possible reduced rate of payment.
Consumer Proposal: A consumer proposal is the most popular bankruptcy alternative, and there are many advantages to filing a consumer proposal.
A consumer proposal allows you to eliminate your unsecured debt, including debt owed to the government, for approximately 35% of the total amount of your debt.
When you make a consumer proposal you propose to your unsecured creditors to repay a certain percentage (usually 30 to 40%) of your debt over a period of time lasting from 3 to 5 years (a consumer proposal can be less than 3 years, but not more than 5).
Perhaps the biggest advantage to a consumer proposal is you can keep the equity in your home and other assets, that would otherwise be lost in a bankruptcy.
Additionally, your income will not increase the cost of a consumer, as it might in a bankruptcy through surplus income payments.
All collection activity and wage garnishments against you will stop once your consumer proposal You also will not pay interest charges during your consumer proposal.
You can include student loans in your consumer proposal before the 7 year period that must pass before student loan debt can be discharged in bankruptcy.
Personal Bankruptcy: Bankruptcy gives you the quickest and most affordable fresh financial start.
In many cases the debtor is able to keep all of their assets and belongings, as they would be protected by the bankruptcy exemptions.
Student loan debt can be discharged in bankruptcy, but only if it has been 7 years since you have been out of school.
If you can make a hardship application this period can be reduced to 5 years.
All collection activy, lawsuits and wage garnishments against you will cease once you have filed bankruptcy. Once you are discharged from bankruptcy – usually after 9 monthts – you can get credit and begin rebuilding your credit rating.
Do Nothing: This approach can be advantageous for some consumers as it leaves open the possibility of the limitation periods expiring, which means you might be able to avoid paying your unsecured debts. Once the limitation period has expired, your creditors will have difficulty collecting from you as the debt will no longer exist.
What are the Disadvantages of Each Debt Relief Option Available?
Each of the debt relief methods discussed here has certain disadvantages and drawbacks as well. The circumstances of your debt situation might chance the disadvantages of certain debt relief options you have.
Selling Assets: If you sell your assets, you will obviously have to do without your asset, or replace it with a less expensive version, such as a cheaper car or a smaller house or apartment.
Selling your assets might also result in a tax bill, and you might be able to receive creditor protection and debt relief through another debt relief alternative without having to give up any of your assets.
Borrowing Money: Borrowing money might mean you get yourself into a deeper financial hole.
You might borrow at high interest rates, or you might harm the relationship with a family member or friend if you borrow from them, and then have trouble repaying your loved one.
Credit counselling: This is an expensive method for dealing with unsecured debt. In almost every case you will enter into a debt management plan to repay 100% of your debt over an extended period of time.
Not only will you be repaying all of the monies you owe with this method, you will also be charged a fee worth up to 15% of the debt you owe to enroll in a debt management plan with a credit counsellor. You cannot include government debt and student loans in a debt management plan.
Consumer Proposal: A consumer must have a steady source of income in order to make an attractive proposal to their creditors, otherwise the creditors will vote to reject the proposal.
Additionally, if you miss three of your required payments in your proposal, your proposal will automatically be annulled (cancelled). If you file a consumer proposal, you will include all of your unsecured debt in the proposal. During the proposal you will not have access to credit in most cases.
Bankruptcy: A bankrupt will lose any of their assets that are not protected by the bankruptcy exemptions (in most cases a debtor will not lose any assets, however).
If you have a large income, a professional status, or are a business owner you cannot file bankruptcy without paying a significant amount, or losing your professional status or the right to operate your business.
Debt Settlement: A consumer must wait at least 6 months before they can make a debt settlement with their creditors.
Before the six month period has been reached, you will receive collection calls and could possibly be sued by your unsecured creditors.
A debt settlement cannot be worked out for government debt such as tax debt and student loan debt.
Do Nothing: If you decide to do nothing, interest will accrue on your overdue accounts, and you will likely receive collection calls, face lawsuits and other litigation.
When is Each Debt Relief Option an Ideal Choice for My Situation?
Whether a certain debt relief option is ideal for you will depend on many different factors, including your income, assets, debt load, and types of debt that you have.
Selling Your Assets: Selling assets can be an ideal choice for certain debtors.
For example, selling assets would be very beneficial if you are about to be sued and you need to raise additional cash to paydown outstanding debt with high interest.
Borrowing Money: Eliminating your debt by borrowing money is an ideal situation if you can borrow from family or friends and you have the money management skills to handle taking on more debt.
If the cost of borrowing money is not inexpensive, it is probably not in your best interests to take advantage of this debt relief option. Borrowing money can also allow you to make a one time lump sum payment consumer proposal.
Credit counselling: Credit counselling would be an ideal situation if you know you are going to have an increase in income in the near future.
Credit counselling can allow a person facing temporary money challenges to lower their monthly payment so they can continue paying their debt while waiting for their salary to rise or to receive a windfall, such as an inheritance.
Consumer Proposal: A consumer proposal allows an unsecured creditor to eliminate up to 70% of their debt.
During a proposal you will be able to repay a portion of your debt over a certain period of time, which gives you some flexibility.
A consumer proposal is ideal for individuals with a steady source of income, and a number of assets that would be lost if the consumer was to go bankrupt.
Bankruptcy: Personal bankruptcy is ideal for individuals with little income, and little to no assets.
If you earn less than $30,000 a year, do not have significant assets, and have a large amount of consumer debt you are having trouble managing, personal bankruptcy is the ideal solution.
Debt Settlement: A debt settlement plan is ideal for consumers that have a loan with an employer, and would like to avoid bankruptcy or a consumer proposal.
Do nothing: This strategy works for consumers who are judgement proof or have debt where the limitation period ids close to expiring, or has already expired.
This strategy also works for consumers who are hoping for a change in their financial circumstances.
When is it Beneficial to Wait to Choose a Debt Relief Option?
In certain scenarios, it might be in your best interest to delay choosing a particular debt relief option.
The reasons why waiting could be beneficial will vary, be there could be circumstances where waiting to deal with your debt can be very beneficial.
A scenario when you would want to wait to take action on your debt is if you have not paid on your debt for a significant period of time and the debt collection limitation period is close to expiring.
Once the limitation period has expired you can avoid paying on your unsecured debt that has reached the limitation period expiry date.
Another scenario to wait to take action on your debt is if you have student loan debt and you have not been out of school for 7 years or more and would like to file bankruptcy.
If you file for personal bankruptcy you must wait at least 7 years from your schooling before you can eliminate student loan debt in bankruptcy.
If you decide to stop paying on your unsecured debt, you can take a “wait and see” approach to see what, if any, of your unsecured creditors sue you for collection.
Once you stop paying on unsecured debt, and a certain period of time has passed, you have a chance to make a debt settlement for less than you owe, or you could wait for the limitation period to pass.
To learn more about different debt relief options you can speak with a Licensed Trustee about all of your options during a free, no obligation consultation meeting.
Need Help Reviewing Your Financial Situation?
Contact a Licensed Trustee for a Free Debt Relief Evaluation