Understanding Safe Debt Settlement Options – What You Need to Know

Exploring Debt Settlement Options

In the intricate labyrinth of debt settlement in Canada, especially in Ontario, numerous players and varied programs offer a helping hand to manage and settle your debts. While some of these options are secure and efficient, others could be risky or even ineffective.

The Spectrum of Debt Settlement Services in Canada

There are primarily three types of Safe Debt Settlement Options in Canada:

  1. Legal debt settlement through a consumer proposal, managed by a Licensed Insolvency Trustee.
  2. Debt management program, offered by credit counsellors, which provides an avenue for interest relief and a repayment plan, without actually settling your debts.
  3. Debt settlement companies and debt consultants who propose to negotiate an informal debt settlement agreement with individual creditors, or may simply redirect you to a Licensed Insolvency Trustee for a significant fee.

The Security of Settling Debts with a Consumer Proposal

The most secure way to settle your debts for a fraction of what you owe is through a consumer proposal. This method, by virtue of being legal and carried out through a licensed insolvency trustee, provides numerous benefits:

  • An immediate stay of proceedings is provided, halting all creditor actions like collection calls, court actions, and garnishments while your debt settlement is being negotiated.
  • The proposal covers all your unsecured creditors. No creditor can opt-out of the debt settlement program, even the Canada Revenue Agency debt.
  • No payments or fees are required until your settlement proposal is officially filed with the government, and you receive full creditor protection.
  • The success rate of this method is high. For instance, at Hoyes Michalos, 99% of settlements negotiated with creditors are successfully approved.

The Risks of For-Profit Debt Settlement Companies

Despite the legislation regulating the operation of debt settlement agencies in many provinces, including Ontario, consumers must still tread carefully. Many debt settlement companies operate under the guise of a law office to circumvent new laws since lawyers are excluded from the debt settlement Act.

Such agencies, whether they label themselves as settlement or debt consulting agencies, often charge large referral fees to unsuspecting consumers to direct them to a licensed insolvency trustee to file a consumer proposal.

Be wary of agencies that:

  • Propose to settle your debts informally. As per the Canadian Bankers Association, less than 10% of informal debt settlement programs succeed.
  • Suggest they can help you settle your debts through a ‘government program’ or refer you to the ‘officer of the court’. These are misleading terms that actually signify a consumer proposal. There’s no need to pay to see a licensed insolvency trustee.
  • Claim to negotiate a better settlement deal with your creditors than the trustee because they ‘work for you’. Often, creditors reject such low-ball proposals, and the savings are never as substantial as the upfront fees paid to the debt consultant.

The Reality of Not-for-Profit Credit Counselling Agencies

Legitimate credit counselling agencies can help you negotiate a repayment plan for 100% of your outstanding debts through a debt management plan. However, they cannot offer a debt settlement because they do not settle your debts for less than you owe.

If your debt is over $10,000 and you are insolvent, settling debts through a formal debt settlement program like a consumer proposal is almost invariably a cheaper and better alternative.

Impact on Credit Report

A common misconception is that credit counselling is better for your credit report. However, both consumer proposal and debt management plan appear as a debt arrangement on your credit report and will remain there for a maximum of 6 years from the date of filing or default.

Debt Management Program Vs Consumer Proposal

A debt management program is costlier as you have to pay off all of your outstanding balances. A consumer proposal settles your debts, often for 35 cents on the dollar or less, allowing you to start saving more money much sooner.

The Rising Popularity of Consumer Proposal

Debt settlement through a consumer proposal is increasingly popular as a means to avoid bankruptcy. Currently, almost half of all insolvencies in Canada are consumer proposals. A settlement agreement via a consumer proposal, filed through a licensed trustee, offers the creditor protection you need while you work out a plan with your consumer proposal administrator to combine all your debts into one affordable payment and fully settle those debts for less than you owe.

The Role of Debt Settlement Companies

A debt settlement company offers to negotiate with your creditors and propose an amount of money to eliminate your debt. This amount is often lower than your total debt. However, it is important to remember that creditors don’t have to agree to work with a debt settlement company, and the company may still charge you fees even if your creditors refuse the offer.

What to Keep in Mind When Considering a Debt Settlement Company

When considering a debt settlement company, be wary of high-pressure sales, unrealistic promises, high fees, and delayed payments to creditors. Always ask for receipts for any payments they make, research the company’s reputation, and carefully review the contract before signing.

How to File a Complaint

If you have a complaint about a debt settlement company, you can contact your provincial or territorial consumer affairs office. Provincial and territorial governments are responsible for regulating debt settlement companies and investigating consumer complaints.

Understanding safe debt settlement options in Canada is crucial to navigating the complex world of debt. It is always recommended to thoroughly research your options and seek professional advice before making any decisions.

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