When should you consider debt settlement?

Deciding on Debt Settlement: When Should You Consider it?

When should you consider debt settlement?When should you consider debt settlement? That’s the question we aim to answer today. To begin with, debt settlement can be viewed as a solution to manage considerable debts. It is a legitimate and legal strategy that stands alongside options like bankruptcy, credit counselling, and debt consolidation.

In a typical debt settlement process, individuals employ professionals from debt settlement companies to negotiate on their behalf with their lenders. The objective is for these negotiations to appease both parties involved: the debtor hopes to pay off a part of their debt while saving on interest charges and potentially reducing their principal balance. On the other hand, creditors aim to recover at least a part of their investment, which may be preferable to a lengthy legal fight to recover the full amount.

The Operation of Debt Settlement in Canada

In Canada, the debt settlement process is straightforward. Let’s take an example of an average Canadian, say, John. John, after using his credit card to purchase an expensive home theater system, finds himself unable to pay off his debt due to an unexpected reduction in his work hours. The growing interest on his debt leads to John falling behind on his credit card payments. Despite his debt being of a moderate amount, he struggles to keep up with the interest, stressed by the persistent letters and calls from his credit card company. John decides to turn to a debt settlement company for assistance, where the debt settlement process follows three primary stages:

Initial Consultation

The process initiates with a cost-free consultation to analyse John’s financial situation. The representative will assess John’s income, savings, and debt, giving advice on whether debt settlement is the most suitable course of action. The factors taken into consideration during this stage include:

  • The amount of outstanding debt: Debt settlement is usually advised for those with more than $10,000 in debt. For those with lesser debt, other options such as credit counselling, a low-interest balance transfer credit card, or a low-interest debt consolidation loan may be more cost-effective methods to escape debt.
  • The type of debt: Debt settlement programs only cover unsecured debt like credit cards or consumer loans. It is not a solution for mortgage payments or student loans.
  • Debt repayment capacity and speed: John needs to prove that he is solvent, meaning that with his savings and income, he can afford the monthly payment agreed with his creditors. The expectation is that he should be able to pay off his debt within approximately three years. If these are unrealistic targets, John may not be eligible for a debt settlement program and would be presented with other options like bankruptcy or debt consolidation.


If John is eligible for the debt settlement program, he can enrol in it. He will then negotiate a contract with the debt settlement company, including the program’s fees and repayment timelines. Once the agreement is signed, the company will commence negotiations with his creditors. Although there’s no law preventing Canadians from negotiating with their creditors themselves, they are likely to get only a small concession on their interest payments and none on the principal. Debt settlement representatives, being experts in the field, are more likely to secure a beneficial deal on John’s behalf than John would be able to secure for himself.


Alongside the company’s negotiations, John must contribute to a special account to accumulate a debt settlement fund. This fund, a lump sum of money, will be handed over to the creditors once a deal is agreed upon. John no longer interacts with his creditors directly. If a settlement is reached, the debt settlement company pays the creditors from John’s account, and the debt is marked as paid.

Is Debt Settlement the Right Choice for You?

If you’ve ever been on the receiving end of a late payment notice or a call from a creditor, you know the stress and anxiety associated with mounting debt. A program designed to reduce your debt and assist you in paying off your creditors might seem like a godsend, but a debt settlement program is not suitable for everyone. Before diving in, consider the following:

  • Debt settlement can harm your credit score: While negotiating, you might be advised to stop paying your debt entirely, a strategy intended to make your creditors anxious about recovering their money. This might be an effective negotiation tactic, but it could severely damage your credit score, potentially affecting your opportunities for housing, jobs, and credit products for years to come.
  • Debt settlement programs are not free: The companies charge fees for their services, and these are not insignificant. The cost depends on the amount of debt you’re looking to settle, the time you’re investing in the program, and your province of residence. You will incur fees either upfront or on a monthly basis, and these are typically not refunded if the company fails to reach a settlement.
  • There’s no guarantee of settlement: Debt settlement companies cannot guarantee their results, and they cannot compel a creditor to accept an offer. This means you could potentially damage your credit score, pay significant fees, and still be left with a mountain of outstanding debt at the end.

Debt Settlement Program Versus Consumer Proposal

In your research for debt repayment options in Canada, you might have come across the term ‘consumer proposal’. A consumer proposal is a legally binding agreement, brokered by an intermediary, between a debtor and their creditors. This may sound similar to debt settlement, and indeed there are similarities, but there are also crucial differences.


  • Debtors work with an intermediary in both cases to try and negotiate a repayment program.
  • Both include unsecured debt.
  • In both instances, the debtor pays the intermediary, who then pays the creditors.


  • In a debt settlement program, debtors work with a representative from the company. In a consumer proposal, they work with a Consumer Proposal Administrator, who is also a Licensed Insolvency Trustee (LIT).
  • The consumer proposal was established by the Canadian government as an alternative to bankruptcy, whereas debt settlement is a private enterprise.
  • As a government-recognized program, the consumer proposal can grant you certain protections that are not available through debt settlement programs. It might protect your assets and put an end to creditor phone calls.

Choosing a Reliable Debt Settlement Company

If, after your research, you feel that debt settlement is your best option, here’s what you need to be aware of:

Unrealistic Guarantees

Being in debt can make you susceptible. Remember that debt settlement companies cannot guarantee any of the following:

  • Debt reduction by a certain percentage
  • Legal protection from creditors
  • Stopping creditors from calling or mailing you
  • Preventing wage garnishing
  • Making your creditors agree to a settlement

High-pressure Sales Tactics

Your debt settlement strategy should be planned and carried out with a clear head and trustworthy partners. If a debt settlement representative tries to pressure you into a decision, it’s probably a good idea to continue your search.

Exorbitant Fees

Do your research and ensure you are getting the best possible rates. While debt settlement is legal in Canada, it is a for-profit business, and should be treated as such. Check prospective programs against the Better Business Bureau and your provincial or territorial consumer affairs office.

Risks Involved in Debt Settlement

While debt settlement may seem like an attractive option, it is crucial to understand the potential risks involved:

  • Impact on Credit Score: Debt settlement can have a negative impact on your credit score, which can affect your future ability to secure loans or credit.
  • Cost: Debt settlement companies charge fees for their services, which can add to your financial burden.
  • Uncertainty: There is no guarantee that a debt settlement company will be able to negotiate a settlement with your creditors.

Alternatives to Debt Settlement

If your debt burden seems unbearable, there are several alternatives to explore. In addition to a consumer proposal, you may consider credit counselling, debt consolidation, consumer proposal loans, or bankruptcy. Like all of these, debt settlement is a legal and legitimate course of action. However, it has serious drawbacks, including a negative impact on your credit score and the addition of another expense to your budget.

Debt Settlement: Beneficial or Detrimental?

Determining whether debt settlement is beneficial or detrimental largely depends on your specific circumstances. If your debt is significant and you’re struggling with repayments, it could be a viable option. However, it’s important to consider the potential negative effects on your credit score and the associated costs.


In conclusion, when should you consider debt settlement? It should be considered when your debt is significant, you’re struggling with repayments, and other debt management strategies have proven ineffective. However, it’s important to be aware of the potential risks and drawbacks, and to explore all available options before making a decision. Always seek advice from financial professionals or credit counsellors to ensure you’re making the best decision for your financial future.

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