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While some Canadians may experience financial hardship due to poor money management, others may experience it due to layoffs, furlough, or reduced working hours among other factors. This financial hardship could lead to the inability to keep up with your bill payments and debts. When this happens many Canadians reach out to a credit counsellor to help them get their financial life back on track. But, are there any drawbacks to this, mainly can it affect your credit scores?
Who Are Credit Counsellors?
Credit counsellors help individuals find solutions for their financial challenges. Their services are offered through both for-profit companies and not-for-profit organizations. Although there are no mandatory requirements to become a credit counsellor in Canada, many professionals are qualified through the Accredited Financial Counsellor Canada Program after completing 1,000 hours of financial counselling.
How Do Credit Counsellors Help?
Credit counsellors will assess your current financial situation and evaluate the different debt relief options available to you. By going through your income, expenses and debt, the credit counselling process is meant to bring individuals out of debt and help them remain debt-free.
Consumer credit counsellors may negotiate with your creditors to come up with a repayment plan that is more suitable for your budget while developing a long-term plan for you to take control of your finances.
How Does Credit Counselling Work?
The credit counselling process starts with a free evaluation. The counsellor will review your finances with you and lay out your options for relief. This means that they will take a close look at your debts, credit and monthly budget to determine which debt solution is the most appropriate for your financial situation.
Some of the most common debt solutions are:
- Debt management program
- Consumer proposals
Although, sometimes individuals simply need some help creating a realistic budget or need basic financial education, both of which a credit counsellor can provide.
Debt Management Programs
Debt management programs typically cover all credit card debt and other unsecured debts. The credit counsellor will contact your creditors to propose a repayment plan with reduced interest rates. The program begins when all your creditors agree to the terms. You will be responsible for making a monthly payment to the credit counselling agency who will then distribute the funds to your creditors according to the terms of the proposal. Debt management programs must be completed within five years or through 60 monthly payments or less.
If your finances do not allow you to pay back the entirety of your debt, your credit counsellor may recommend that you file a consumer proposal to repay a portion of what you owe. A consumer proposal is filed with a Licensed Insolvency Trustee and full debt forgiveness is provided once the reduced amount is paid off. While the details of each proposal are dependent on the debtor’s assets and financial situation, settlements can be as low as 30% of the original debt amount. Proposal payments must be completed within five years, or 60 monthly payments or less, and they do not carry any interest.
For those experiencing extreme financial hardship, bankruptcy serves as a last resort. Filing for bankruptcy will relieve you of your all debts except for a few exceptions. It will also have a larger impact on your credit. Like a consumer proposal, a bankruptcy is filed through a LIT and involves making payments for 9 or 21 months depending on whether you need to make surplus payments.
Will Credit Counselling Affect My Credit?
Consulting a credit counsellor for advice on your financial situation will not affect your credit. It is only when you enroll in a debt relief program that it shows up on your credit report, but the effects of each program are different.
|Credit Counselling Program||Effect On Credit|
|Debt Management Program||When you enter the program, a note is added to your credit profile and will remain until two years after the completion of the program.|
|Consumer Proposal||A consumer proposal will appear on your credit report until three years after you have paid off all debts according to the proposal, or six years from the date the consumer proposal is filed, whichever comes first.|
|First Bankruptcy||A first bankruptcy will show on your credit report for six to seven years after the date of discharge.|
|Second Bankruptcy||For a second-time bankruptcy, it’ll stay on your credit report for fourteen years.|
How do I choose a good credit counsellor?
Are there any fees involved with credit counselling?
Will credit counselling help my credit scores?
Can credit counselling get rid of my debt?
What happens if I miss a payment after I enter a debt management program?
Before deciding which credit counselling agency to work with, it may be a good idea to look up the individual or organization with the Better Business Bureau. Be sure to know what your rights are and to do your due diligence in verifying the qualifications of your credit counsellor.
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