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Many Canadians are currently experiencing financial hardship as a result of layoffs, furlough or reduced working hours among other factors. This financial hardship could have a direct or indirect impact on your credit score. If you are having trouble keeping up with your payments to pay back debt, you can consider talking to a credit counsellor.
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 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 programs, consumer proposals and bankruptcies. 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 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 debts but it will have a larger impact on your credit and can prevent you from doing things, such as serve as an officer or director of an incorporated business or obtain optimal financing.
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 profile, but the effects of each program are different.
- 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.
- Bankruptcy: A first bankruptcy will show on your credit report for six years after the date of discharge with the minimum period of bankruptcy being nine months. For a second time bankruptcy, the term increases to fourteen years.
How do I choose a good credit counsellor?
Are there any fees involved with credit counselling?
Will credit counselling help my credit score?
Can credit counselling get rid of my debt?
What happens if I miss a payment after I enter a debt management program?
Is Credit Counselling Right For Me?
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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