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When it comes to consumer debt, being in over your head can be extremely stressful. When you are struggling to make minimum payments, missing payments or dodging calls from collectors, you need help.

The sooner you get on top of your debt, the better. Once the money you owe becomes overwhelming, it can be challenging to earn enough to make minimum payments. Increased interest charges and late payment fees add up and creditors may raise your interest rates too. As the amount you owe increases and as you begin to miss payments and max out credit cards, your credit score can be reduced significantly.

While we don’t exactly have debt forgiveness, Canada does have non-profit credit counselling services and Licensed Insolvency Trustees in every province and territory. These professionals can help with finding solutions to get out from under the crushing load of heavy debt.

Frankly speaking, there is no easy solution. Even with help, this is going to take time and effort on your part. Aside from extra stress, consequences for spending outside of our means can include the need for a spending freeze and a negative impact on your credit score.

What Is Debt Forgiveness In Canada?

Debt forgiveness involves having your debt partially or completely forgiven. That means you would no longer be obligated to make any further payments to your creditor.

This option can help you save money by paying less than what you originally owe your creditors. It can also help you eliminate your debt quicker and avoid being slapped with ongoing interest charges for overdue payments. 

While debt forgiveness can help you deal with your mounting debt, it comes with some drawbacks. Most notably, your credit score may take a hit. 

Does Debt Forgiveness In Canada Exist? 

In Canada, no official government-backed debt forgiveness program exists. However, a couple of legal debt solution options are available for debt forgiveness: consumer proposal and bankruptcy. 

Both of these options are governed by the Bankruptcy and Insolvency Act (BIA) and require the assistance of a Licensed Insolvency Trustee (LIT), which is a federally-regulated professional that assists consumers with debt issues.

But before you opt for these drastic solutions, you may also consider a debt management plan (DMP) to eliminate your debt.

Government Debt “Forgiveness” Programs In Canada

While there are no government-backed debt forgiveness programs in Canada, there are debt relief programs that forgive debt. 

Debt Management Plan (DMP)

A DMP is a debt relief option that may help you pay off your debt. A professional credit counsellor will work on your behalf to negotiate with your creditors to come up with a loan repayment plan that works both for you and your creditors. The program works by consolidating your debt into an affordable payment plan and reduces or eliminates interest fees. 

Debt Settlement 

The government of Canada does not offer any debt settlement programs, however, it does have regulations debt settlement companies must follow. You can work with a debt settlement company to help you settle your debts for less than what you owe through tactful negotiations with your creditors 

Consumer Proposal

This type of debt forgiveness is a legal process that involves making an offer to your creditors to pay a portion of the debt you owe, with the remainder of your debt forgiven. For this option to work, your creditors must accept your consumer proposal. If they do, you can arrange for an alternative payment program with the help of a LIT and avoid losing valuable assets through bankruptcy.

Bankruptcy

This is a last resort for consumers who are drowning in debt. Bankruptcy is a legal process that involves surrendering your assets (with exceptions) to an LIT, who will then sell these assets and use the proceeds to pay your creditors. It has a significant effect on your credit score and therefore will make it more difficult to secure credit until the bankruptcy is discharged and no longer appears on your credit report.  

Should You Speak To A Professional?

You can get help with debt relief from a non-profit credit counsellor. They can support you through the process of creating a budget, provide education in money management, and refer you to insolvency lawyers if that is the route you choose to take.

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How Does A DMP Offer Debt Forgiveness In Canada? 

A DMP involves hiring a credit counsellor who will contact each of your creditors to create a new payment plan. They may also negotiate to have your late fee charges and interest waived. With the help of a credit counselling agency, all your unsecured debt is consolidated into one place with a more manageable payment plan.

While your debt isn’t forgiven in a DMP and are required to pay back your debt, it may forgive future interest and fee charges you may incur without the DMP. 

How Does Debt Settlement Offer Debt Forgiveness In Canada? 

When you choose a debt settlement, a debt expert will negotiate, on your behalf, a lump sum payment to each of your creditors. The main stipulation is that the rest will be forgiven. The settlement is usually between 20% and 80% of the full amount. Creditors are not required to accept a debt settlement and the fees charged by debt settlement companies are often high. 

This option may not be possible for everyone due to the large sum of money needed to carry the settlement forward. If you think a debt settlement is the best option for you, you should consider negotiating the settlement on your own. 

How Does A Consumer Proposal Offer Debt Forgiveness In Canada? 

With a consumer proposal, you can have a certain percentage of your debts forgiven in Canada. Your licensed insolvency trustee will negotiate with your creditors, to reduce the amount you owe them. If your creditors agree to the proposal, you will only have to repay the amount negotiated, the rest of your debts will be absolved. 

Moreover, when you file a consumer proposal, interest will also stop accumulating, collectors will stop calling, you’ll get to keep your assets and you will be protected from wage garnishments and legal action. 

However, do note that this debt relief option will leave a negative mark on your credit report for several years, which can affect your ability to access credit in the future. 

How Does Bankruptcy Offer Debt Forgiveness In Canada?

The decision to file bankruptcy can be difficult to make. It is usually a last resort decision when no other options are suitable. In some cases, however, the benefits can far outweigh the drawbacks.

With bankruptcy, you may lose certain assets and need to pay surplus income payments depending on your income. But once your bankruptcy is discharged, all your unsecured debts will be forgiven.

Do Debt Forgiveness Programs Affect Credit? 

Yes, depending on the debt relief option you choose, having your debts forgiven can negatively impact your credit score. However,  the negative impact it may have on your credit is well worth it if it helps you regain control of your finances. Plus, you can always rebuild your credit. 

How Can You Manage Your Debt On Your Own? 

There are a few ways you can get proactive and start finding solutions when things start to get tight.

Create A Budget

Create a budget and develop a plan for paying down debt. There are plenty of free worksheets, budget templates, and mobile app options to help you with this. Moreover, a budget will help you track your spending and help you identify areas to improve.

Consolidate Your Debt 

If you can qualify, consolidate debt with a low-interest credit card or a personal loan. This solution is ideal for those who struggle to manage multiple debts, but still have the finances and credit to make payments. 

Request a Lower Rate

Another option is to call creditors yourself and ask for a lower rate. If you haven’t missed payments and are still in good standing, you may be able to negotiate a lower rate or payment plan.

Bottom Line

Before you make any decisions about debt forgiveness, consider your options carefully. You may feel stuck now, but you don’t need to stay here forever. Once you clean up your debt, you can begin to rebuild your credit again. The key is to change the way you manage your money. With some clear thinking, an effective budget, and the motivation to stick to your plan, you can have a positive relationship with your finances and work toward your future goals.

Debt Forgiveness FAQs

Is there debt forgiveness in Canada for child support and alimony?

Child support and alimony need to be paid, regardless of your financial situation.

Is there debt forgiveness in Canada for secured loans?

Depending on your circumstances, you may be required to sell a home or vehicle to pay off mortgage or car loan debt. Failing that, you could face foreclosure or repossession.

Are there any debts that can’t be reduced or forgiven?

When you decide which debt relief option to take, make sure you are clear about which accounts will be included in the program. Typically, credit card debt, unsecured lines of credit, payday loans and overdue bills can be forgiven. 

Is there debt forgiveness in Canada for student loans?

Student loan debt cannot be included in bankruptcy or consumer proposals for at least 7 years after finishing school. There is a hardship provision that may reduce that time to no less than 5 years. You must be experiencing financial difficulty and acting in “good faith” to meet your repayment obligations.

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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