Debt Restructuring

How Debt Restructuring Works in Canada

Navigating through a mire of debt can at times feel oppressive, and this is where debt restructuring, a method designed to circumvent bankruptcy, comes into play. In Canada, this process can be a lifeline for those grappling with overwhelming debt.

What is Debt Restructuring?

Debt restructuring is a process that effectively wipes out a substantial part of your debt, typically between 60 to 80%, while the remaining balance is paid over a period of up to five years interest-free. It’s largely seen as an alternative to bankruptcy, providing a fresh, albeit challenging, monetary start.

Why Consider Debt Restructuring?

Creditors are often in favor of this method because they receive some return, despite it being less than what was originally lent. In contrast, a bankrupt debtor may offer little to no returns. However, this arrangement does have its drawbacks, the most significant being a hit to your credit rating.

Debt Restructuring

The monthly payments to service an unmanageable debt can be an enormous burden. These payments are essentially for past financial errors that can prevent an individual from living comfortably in the present. More critically, they can be a substantial impediment to saving for retirement or a home’s down payment.

Characteristics of Debt Restructuring

Time to Pay Off Debt

Debt restructuring allows up to five years to repay the debt interest-free. There is no penalty for early repayment. In fact, it’s beneficial to pay it back as swiftly as possible because it remains on your credit record as an R7 for three years past your last payment.

For example, if you pay off your debt in three years, it will remain on your record for those three years plus an additional three years.

Not Necessarily Paying Back Everything You Owe

Contrary to what you might think, debt restructuring doesn’t always mean repaying everything you owe. Even though repaying all your debt might seem the right thing to do, this approach often leads to failure because the monthly payments are too high. The primary objective here is to ensure a fresh start.


However, dealing with the debt should not be done in isolation. The restructuring plan must include a comprehensive credit rebuilding program. Otherwise, you risk future financial failure and exclusion from mainstream banking/lending products due to poor credit.


Responsibility to Settle Debts

Ignoring your debt problem will not absolve your responsibility. If you fail to pay your debts, creditors can transfer your debt to a collection agency, obtain a judgment against you, and even garnish your salary or pension, or place liens against assets.

A debt restructuring plan involves setting up a contract that becomes binding between you and your creditors, where you pledge to pay back a portion of it.

Not a Quick Fix for Debts

Debt restructuring isn’t a shortcut to escape debts. It requires a commitment to fulfill the terms set out at the beginning. After your creditors agree to the proposal, you must keep up with the payments for up to five years. If you fall behind by three payments, your contract will be annulled, and you’ll be back to square one.

Not a Lifelong Burden

Once your proposal has been successfully completed, it will be removed from your credit record permanently three years later.

Access to Credit

Debt restructuring won’t permit immediate access to credit. You need to demonstrate to creditors that you can manage credit responsibly. After your proposal is accepted and everything is reported correctly, you can start rebuilding your credit by getting a secured credit card.

This involves making a down payment on a credit card, using it, and then paying off the monthly balance entirely.

Ensure that you never exceed 75% of the limit — it’s even better if you can keep it below 50%. This will start adding positive items to your credit report and demonstrate responsible credit usage.

In Summary

A comprehensive debt restructuring plan, when combined with a credit rebuilding program, can be an effective way to crawl out from under a mountain of debt, burdensome monthly payments, and poor credit. For many, it’s the only effective way to get a fresh start.

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