How to Get Relief From Credit Card Debt
If you’ve found that you’re deep in credit card debt and aren’t sure what the next best step is, you have a handful of options to explore before throwing up your hands in surrender.
To keep your credit intact, only your last resort should be filing a consumer proposal or bankruptcy.
The first steps include negotiating for yourself, having a company negotiate with your credit card company on your behalf, researching debt management and consolidated payments, and looking into debt settlement programs.
Each of these steps can be done with a credit counselor; finance experts at Bankruptcy Canada can help counsel you through your financial problems, without judgment.
Finally, if you’ve exhausted these options, you may need to involve a licensed insolvency trustee to begin the process for filing a consumer proposal or claiming bankruptcy.
First, we’ll go through the other options so you can see what you may have to work with.
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Direct negotiation with your credit card company
If you are looking to negotiate with your credit card company to reduce the interest rate, there are several things you may want to consider.
First, you should use a script to negotiate.
There are multiple options online.
In using a script, you’ll know what your next steps are when speaking, and you’ll know what to expect from the other end.
Additionally, whomever you speak with at the credit card company will appreciate the clarity with which you present the negotiation.
The second aspect you should consider is that a credit card company is likelier to reduce your rate if you consistently pay off your payment monthly.
Credit card companies make the majority of their income on interest, so if you are paying down your bills regularly, they aren’t making much money from you as an individual.
Because of this, they are likelier to extend an olive branch and reduce the APR, since they won’t be losing much on you if you are already paying off your interest.
It’s important to remember that a credit card company is a business, and their goal is to provide a service (credit, in this case) while generating income on interest and yearly fees.
If you are able to have your interest reduced, make sure you continue to make your minimum credit card payments each month.
Ideally, you should be paying off larger amounts than the minimum so you are not only paying off the interest but the principal due as well.
This will help you dig out of your credit card debt more quickly.
When negotiating, it’s important you make sure things like annual fees are not increased or added since that is an easy way for the credit card company to continue generating income, while also adding to your debt.
Keep in mind that you have nothing to lose by asking to have a fee waived, or interest reduced.
Having a debt expert negotiate for you
If you are not able to make your minimum payments or have fallen behind in payments, your next step should be to reach out to an agency to have them negotiate with your credit card company on your behalf.
While a credit counselor or financial expert will essentially be asking the same thing you have from the credit card company, they have a lot more leverage than you do as an individual.
While they may negotiate interest or small fees, they are also finance professionals that may be able to have the company compromise on how much principal you will be paying back.
Debt repayment plan
The value of using credit counseling when consolidating unsecured credit card debt is that they will be able to explain the various options you may have in layman terms.
After trying to negotiate interest down or reduce annual fees, the next step a credit counselor may take is to organize a debt management program for you, also known as a debt repayment plan.
The goal of this is to establish a voluntary agreement between your creditors and yourself.
Typically creditors harassing calls will cease, interest is reduced or frozen completely, and you will be responsible for providing a monthly lump sum payment to your credit counsel agency who will then provide the funds to your creditors.
This is very helpful when you are bouncing between multiple credit card companies since your financial expert will be responsible for allocating the lump sum between the various companies.
A huge advantage of using a debt management plan is that it will not directly negatively affect your credit, and may in fact improve your credit rating with your timely monthly payments.
Orderly payment of debt program
Another option that a credit counselor may advise you to take advantage of is that of the orderly payment of debt program if you are a resident of Alberta, Saskatchewan, Prince Edward Island, or Nova Scotia.
The alternative government program is aimed to get people out of debt and learn better money management along the way.
Unlike a consumer proposal, the program requires the debtor to repay the debt in full.
However, creditors agree to a fixed payment schedule with a reduced interest fee of 5%.
Similarly to a debt management program, your unsecured debts will be consolidated so that you are paying one lump sum each month.
Unlike the debt repayment plan, this is a court-administered program.
Once agreed upon, creditors can no longer take legal action against you, or harass you by phone or mail, as long as you continue to make payments.
The program allows you to make payments for up to five years, but the average amount of time it takes to repay debt via the OPD program is approximately three years.
Benefits of the OPD program includes the following:
- You are able to keep your assets;
- The amount you pay each month is derived from your unique individual circumstances, including your income;
- You are free to pay off your debt earlier if you so choose;
- The interest rate is capped at 5%.
In addition to paying the debt, you will be required to complete an educational part of the program.
This can be completed in person or online.
Something else to consider is that while you are using this program, you are not allowed to apply for new lines of credit.
Once you have fully repaid your debt, it will remain on your credit for three full years.
However, during this time you are able to apply for credit as you begin rebuilding your credit score.
Debt settlement programs
The next option you may want to consider is the debt settlement program.
What exactly is a debt settlement program?
This is an option in which you are repaying only a portion of the debt you owe on your unsecured debt.
A debt settlement specialist will work with you and your creditors to agree upon one lump sum that you will pay them, and in doing so, the creditors will erase the rest of the debt you owe.
While you may not be able to keep up with monthly payments with growing interest, you may find you are able to obtain a lump sum either by borrowing money from a family member or by selling an asset.
The main goal of debt settlement is to keep you from needing to file for bankruptcy since a creditor is likelier to receive more in a settlement than that of a consumer proposal or bankruptcy.
You do need to consider that your credit score will decrease, and the notation that these debts were settled, rather than paid, will be on your credit score for up to six years.
If you work directly with Bankruptcy Canada, credit counselors may be able to negotiate to reduce the length of time that notation stays on your credit score.
When you use debt settlement, make sure that you have fully researched the specialists you are working with since fees will vary depending on which company you choose to use.
One way to do this is by varying they are accredited and by checking with the Better Business Bureau to check what standing they are in.
You should only be charged the settlement fee from the financial professionals after they have successfully negotiated with your creditors.
Bankruptcy and Consumer Proposals
These should be the last options you look into since they have the largest effect on your life, and will remain on your credit score for longer than the alternative options.
When you claim bankruptcy, you no longer own your assets, while in a consumer proposal you are typically allowed to keep your assets.
If you are struggling with mountains of credit card debt and are unsure how you will repay them, don’t immediately think you are insolvent.
You have options, and the credit counselors at Bankruptcy Canada can help you find the right option for your financial situation while also helping you become educated on how to maintain a good credit score and stick to a monthly budget.
Contact us today to talk about the debt relief options you have.