Life in debt can be overwhelming. In the face of an increasingly complex and challenging financial landscape, many Canadians have turned to personal debt restructuring as a viable solution. Here’s a comprehensive guide to help you understand how it works, and whether it’s the best solution for your financial situation.
What is Personal Debt Restructuring?
Personal debt restructuring is a financial strategy that involves negotiating with your creditors to alter the terms of your debt repayment. It often results in you paying back a reduced amount that is more manageable and in line with your financial capacity.
This process can be a lifeline for those struggling to meet their financial responsibilities. Contrary to common misconceptions, it is not always necessary to fully repay your debts or declare bankruptcy. However, it’s also important to note that debt settlement or restructuring does impact your credit rating.
For instance, a family burdened with $50,000 in unsecured debt and struggling to keep up with the minimum payments can quickly find themselves falling deeper into debt and becoming susceptible to high-interest lenders of last resort.
When Debt Becomes Unmanageable
Debt becomes a problem when it increases to a level where your income can no longer support the repayments, and you have no available credit left to supplement your income.
At this point, creditors start to realize that you might consider filing for bankruptcy, a scenario in which they could potentially end up with nothing.
Thus, debt settlement becomes a viable option. It allows creditors to recover a portion of your debt and gives you a chance to regain control over your finances.
The Impact of Debt Restructuring on Credit Rating
A common objection to personal debt restructuring is the impact it has on your credit rating. While it’s true that your credit score takes a hit, it’s important to put things in perspective.
Your credit score is just one aspect of your overall financial health. It shouldn’t be the only factor you consider when evaluating your debt repayment and settlement options. It’s crucial to consider the long-term financial implications as well.
While your credit score can be rebuilt and reestablished following a successful debt restructuring proposal, the money you spend each month servicing your debt is irreplaceable.
The True Cost of Preserving Your Credit Rating
Many people find it hard to accept the temporary hit to their credit rating that comes with debt restructuring. There’s a widespread belief that a good credit rating must be preserved at all costs.
However, this attachment to your credit score can cost you dearly. For instance, while your credit rating can be improved in a few years, it could take you a decade to pay off $50,000 in unsecured debt.
Bankruptcy results in an R9 credit rating, while a consumer proposal leads to an R7. However, in both cases, the downgrade in credit rating is temporary. You can start repairing your credit immediately with the right plan.
The Irony of High Credit Ratings and High Debt
It’s ironic that many debtors maintain excellent credit ratings yet have no clear roadmap for becoming debt-free and building wealth through savings or investments. Their entire cash flow goes towards servicing their debt and paying interest.
This arrangement works in favor of the creditors but acts as a significant barrier to finding a long-term solution to your financial difficulties.
When you’re neck-deep in debt, something has to give. One option is to restructure your debt and establish a monthly payment plan that you can genuinely afford. You can then work on rebuilding your credit rating.
How Much Can Debt Restructuring Save You?
It often comes as a surprise to many Canadians just how much they can save with debt restructuring. Here’s a chart that shows the potential savings for an average Canadian with $48,000 of unsecured debt.
| Client Options | Monthly Payment | Years to Debt Free | Total Repayment | Credit Rating Impact |
|---|---|---|---|---|
| Do Nothing | $1091.63 | 10 years | $130,994.38 | 10 years |
| Credit Counselling (60 month program) | $905.82 | 5 years | $54,349.16 | 8 years |
| Regular Consumer Proposal (60 month program) | $280.00 | 5 years | $16,800 | 8 years |
| Credit Acceleration loan (lump sum proposal) | $331.52 | 4 years | $15,912.74 | 3 years |
When Should You Consider Debt Settlement?
If you’re attempting to pay your debts month by month, you might find yourself on a path that has no end in sight for many years – even decades.
A person with a debt of $40,000 is likely paying anywhere from $800 – $1200 a month, just to service the debt. At that rate, it could take anywhere from 5 to 25 years to pay off the debt, depending on the amount paid each month and the interest rates.
All that money put towards paying off large debts bit by bit is money that can never be recovered. The debtor may maintain a good credit rating, but their bank account is continually being depleted.
Exploring Your Debt Restructuring Options
There are different options available to every debtor, and it’s important to learn about them all.
You can meet professionals in-person at a local office or receive more information via email. The most crucial step is to take action. After all, the first step to overcoming the burden of debt is recognizing that a problem exists and seeking help to solve it.
Personal debt restructuring can be a successful strategy for managing overwhelming debt. However, it’s important to understand its implications fully and seek professional advice to make an informed decision. The goal should always be to regain control of your financial future.
