Having trouble handling your mountain of debt? Don’t worry, you’re definitely not alone. In fact, debt troubles are a common issue for many Canadian credit users out there. What’s important, if your debt is becoming a problem, is that you take the proper steps to stop it from getting any worse and alleviate it wherever possible. If you’ve been in debt for a while and have been unsuccessful in reducing it so far, don’t give up! There is always a way out of debt, as long as you’re willing to put forth the effort.
If either of those cases sounds like yours, or if you’re just interested in knowing how to manage your debt before it becomes unmanageable, keep reading. Loans Canada has some information that you might find helpful.
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Debt Management Products
Whatever type of debt situation you find yourself in, there is surely a solution, even under the most drastic of circumstances.
Debt Consolidation Loans
When debt becomes too overwhelming to handle, a debt consolidation loan is one way to get back on track. Debt consolidation is when you get a new, larger loan that you can use to pay off your other smaller debts. The point of this type of loan is to reduce your monthly payments and get a lower interest rate so that you pay off your debts quicker.
Typically, there are two common ways that Canadian borrowers use to consolidate their debts, using an unsecured debt consolidation loan or with your home equity (if you’ve been mortgaging a house). Both forms of consolidation have their advantages and disadvantages, as you’ll see listed below:
Advantages
- Lower, more reasonable interest rates
- Most of the money you’re paying goes toward the principal payments (rather than interest rates) so you can pay your debt faster
- You’ll get out of debt faster and become less stressed
- It’s easier to plan and pay for monthly payments for one loan rather than for many different loans
- You can use collateral, like your home, to reduce interest rates even further
- You can keep a good credit rating if you consolidate quick enough
- You can protect your credit score because you’re paying your creditors back, in full, right away.
- Consolidating your loan is beneficial for your credit rating and score in the long run because you’re paying off all your smaller debts faster and in full using the new loan.
Disadvantages
- Longer Repayment Time. Even though you’re paying a lower interest rate or making smaller monthly payments, you’re prolonging the time it takes to become debt-free.
- Fees. While a debt consolidation loan can help you repay your debt and finally become debt-free, there are fees associated with the service, so make sure you keep that in mind. You can also consolidate your debt on your own for free, but it may be hard for you to find a loan with a lower interest rate.
- Risking Your Home. A home equity loan is a great way to consolidate your debts. However, you need to be aware that by doing so, you are risking your home if you can’t repay the loan.
- Decreased Credit Score. Getting a new loan will affect your credit score negatively. Applying for any new credit product puts a notice of a “hard inquiry” into your credit report, causing your credit score to drop a few points. However, keeping on top of paying off the loan will have a larger positive effect in the long term.
For a more detailed explanation of consolidation and how it can help you, click here.
What If I Have Bad Credit?
Creditors use your financial history and credit score to determine if you are a risky borrower or not. For that reason, it can be much harder to qualify for a consolidation loan if you already have bad credit. However, offering collateral or finding a co-signer can greatly increase your chances. With a decent credit rating, constant income, and average expenses, receiving a consolidation loan shouldn’t be a problem.
What do bad credit lenders look for when assessing your loan eligibility? Find out here.
Debt Management Programs (DMP)
Debt management programs are organized plans that help people eliminate their debt. Once enrolled, you’ll work with a credit counsellor to create a program that will help you get out of debt. This program isn’t a loan, but rather a system that combines all of your qualifying debt payments into one monthly payment you can afford, based on your current budget.
You’ll repay your debt through your credit counsellor, who will collect your monthly payment and distribute it to your creditors and lenders. Your counsellor will guide you through the whole process and make sure that you complete your program within the agreed upon time frame.
Advantages
- Reduced interest rate.
- Less harassment from your creditors.
- Less stress about payments.
- No need to sell off your assets.
- Helps rebuild your credit rating.
- Support. Your program provides you with free one-on-one advising and credit education.
- All your information stays private. There is no public record on file. All debts involved are removed from your credit report 2 years after you finish the program.
- Creditors often appreciate your effort and view these programs better than if you were to just declare bankruptcy.
Disadvantages
- Your credit counsellor and your creditors must strike an agreement before the program is able to start.
- If not managed properly, your monthly payments can cause even worse debt.
- During the 2 years when your credit is affected by the program, it will be tougher for you to get approved for any new credit products.
- Some credit counselling agencies charge fees for their services.
- Any credit accounts registered within the program will be frozen during that time.
Debt Settlement
Debt settlement is a method of reducing your debt, rather than paying it in full. It involves negotiating with your creditors in order to decrease the amount you owe them.
Look here to find out how a debt settlement would affect your credit.
Essentially, both parties involved will come to an agreement for you to pay a smaller amount, which would be noted and considered as full payment. Depending on what you negotiate with your creditors, you’ll either make one large payment or several smaller payments as a part of a payment plan. By reducing the quantity owed, the lender will still get paid but you’ll be able to save money. Generally, most creditors will agree to a debt settlement because they would rather get paid a percentage of what you owe them than nothing at all, which would happen if you filed for bankruptcy.
Advantages
- A debt settlement would reduce the total amount you owe.
- Your stress is reduced in the process.
- It prevents future payments.
- You’ll be debt-free sooner.
- You can focus on rebuilding your credit score.
- You can avoid more drastic debt relief options like bankruptcy.
Disadvantages
- Debt settlement will show up on your credit report for several years.
- Your credit score and rating will be negatively affected.
- Creditors don’t always agree to debt settlements, in which case you might have to seek a more drastic debt relief option.
Thinking about negotiating a debt settlement on your own? Read this first.
Credit Counselling
Credit counselling is the process of guiding individuals toward becoming debt-free through education. Credit counsellors can provide you with valuable lessons about debt management and ways to improve your spending habits. These counsellors also negotiate with creditors on your behalf, in order to reduce interest fees or to reduce the total amount you owe. The support of credit counsellors is very helpful for those who aren’t good at managing debt. By evaluating your credit score and report, and by analyzing your spending patterns, your counsellor can create a budget to help you reach your financial goals.
For some more information about credit and debt counselling, check this out.
Credit counselling is provided by Credit Counselling Agencies. Some of these agencies are nonprofit and some charge for their services. Consulting a credit counselor will appear on your credit report for up to 3 years after completing the program. Thus, potential creditors will know that you’ve had difficulty managing your debt in the past.
Duties of a Credit Counsellor:
- Financial Counselling – analyzing your situation and helping you work toward financial freedom
- Budget plans – developing a personal budget plan that works for you
- Debt repayment plans – helping you establish a monthly repayment plan that you can afford
- Information and tips on money management – providing new tips and skills in planning and budgeting your money, including spending habits and strategies.
Want to know about credit counselling in your province? Consult our webpage.
Consumer Proposals
As we’ve mentioned in previous articles, consumer proposals, while beneficial in many ways, do have a lasting, negative effect on your credit. However, they are also an effective and often necessary debt management tool. Anyone who wants to file a consumer proposal in Canada must meet with a licensed insolvency trustee, who will guide them through the process. Once you’ve hired a trustee, they will negotiate a “proposal” with your creditors on your behalf to have your outstanding debt amount and interest rate reduced, as well as to have your payment plan extended, similar to a debt settlement.
Read this to find out how long information remains on your credit report.
Here are a few elements that you can expect to encounter during the consumer proposal process:
- You must have less than $250,000 worth of debt (excluding mortgages on your principal residence).
- Your trustee will create a proposal to present to your creditors.
- Your creditors will either accept or reject your proposal.
- If more than half of your creditors accept your proposal, your debt will stop accumulating interest.
- Your creditors will have to end all collection action as there will be a “stay of proceedings” placed on your credit accounts.
- Typically, you will keep all your assets.
- Payment plans vary but you can expect to make a monthly payment based on your monthly income.
- Debt must be fully paid back within 5 years.
- You will have to attend credit counselling meetings
- Your consumer proposal will remain visible on your credit report for 3 years after your proposal is completed.
- Any accounts associated with your consumer proposal will get an R7 credit rating.
Want to know the difference between a credit score and a credit rating? Read this.
Bankruptcy
The most extreme debt management option, which should only be considered as a last resort, is to file for personal bankruptcy. As you would with a consumer proposal, if you’re thinking about filing for bankruptcy, you’ll need to meet with a licensed insolvency trustee, who will make sure that you will, in fact, benefit from the process.
Here are a few typical steps involved when you file for bankruptcy:
- First, your trustee will provide you with all the necessary information and help you fill out all the required paperwork.
- As soon as your bankruptcy is filed, a “stay of proceedings” will be placed on your accounts.
- Your creditors will also be notified by your trustee so that they can make a claim.
- Any outstanding tax returns that you have will be filed and any money that you owe the CRA will be included in your bankruptcy.
- You’ll be required to provide a monthly income statement.
- Depending on what your income is like, you may have to make surplus income payments.
- You will also be required to attend credit counselling sessions.
- Any accounts associated with your bankruptcy will get an R9 credit rating, which is the worse rating you can have.
Click here to learn which debts can and can’t be included during a bankruptcy filing.
Need Help Choosing The Right Debt Management Options?
Loans Canada offers a wide variety of management and debt relief products and services, fill out an application today to get matched with the right solution for your needs.
