Debt Relief – What are your options?

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Debt is a part of life but if you’re currently struggling and can’t quite seem to get on top of all your debt it might be time to consider getting help. Debt can be isolating and more often than not you’ll feel like you’re the only one going through a tough time. In reality, there are thousands of people going through money troubles just like you and there are countless options to help you get the relief you need.

The first step towards getting out of debt and back on track is accepting the help that’s available to you. The second step is deciding what options are best for you and your unique financial situation. The 5 most common debt relief options are debt consolidation loans, debt management programs, debt settlement, consumer proposals, and bankruptcy. Understanding the differences between each of these options will help you be better equipped to make the right choice for you.

Check out how a credit counselling agency can help you with debt.

Debt Consolidation Loans

Debt consolidation loans are a great option for someone who has a lot of high-interest debts. Here are the main types of debt consolidation loans available:

  • Personal loan – This type of loan is typically unsecured, meaning you don’t have to put up any type of collateral to be approved. It’s the best option for those who simply need to pay off their credit card debt or other types of high-interest debt. The unsecured debt consolidation loan is typically harder to get because it is unsecured, so a higher credit score is often required. 
  • Home Equity Loan – You can consolidate your debts using a home equity loan. It is a secured loan that uses your house as collateral. This is obviously a great option for those who have a mortgage and have paid off at least a small part of it. However, because your house acts as the collateral, you could potentially lose your home to creditors if you fail to make your loan payments. 
  • Credit Card Balance Transfer – If your source of unmanageable debts stems from credit cards only, you can consolidate your credit card debt with a credit card balance transfer. A balance transfer often has a very low rate (some as low as 0% – 0.97%) for a period of time (usually between 6 to 9 months). This introductory rate can help you save a lot of money in interest. However, it’s important that the debt is an amount you can pay off within the introductory rate period. 

Advantages and Disadvantages

Advantages Disadvantages
You can save on interest by consolidating all your high-interest debt with a lower interest rate. You may not be eligible for a debt consolidation loan. 
You can lower your payments by extending the loan term. You may require collateral or a co-signer to qualify.
Your multiple debts will be consolidated into one payment, making it easier to manage and track. Depending on how long you extended your repayment term, you can end up paying more in interest even if you consolidate with a lower rate. 
You can improve your credit. A new type of loan with improve your credit mix, reduce your credit utilization (if you don’t close your credit card accounts) and improve your credit history. When you apply for a new loan, you may be subject to certain fees like loan origination fees and administration fees. This could potentially offset the savings you get from consolidating. 

Debt Management Programs

If you are unable to qualify for a debt consolidation loan because of a low credit score or other financial issues then you might want to consider a debt management program. With a debt management program, you’ll have the support of a trained counsellor who will help you throughout the whole process. When you enter a debt management program, your credit counsellor will negotiate with your creditors to come up with a payment plan that works for you and them. Typically, your credit counsellor will work to decrease your balance owed, interest rate, and monthly payments. Like a debt consolidation loan, a debt management program will: 

  • Save you money because of your lower interest rates.
  • Simplfy your payments as you’ll just need to make one simple and affordable monthly payment to your credit counsellor, instead of many to several different creditors.
  • Clear your debt in 3 to 5 years.

Debt management programs are meant to help you pay off your debts and learn to handle your finances so that you won’t become overwhelmed with debt again. Debt management programs are often hard work but in the end, you’ll have the satisfaction of knowing you persevered and became debt free.

debt management options

Debt Settlement

Debt settlement is best for those who are deep in debt and don’t have enough or make enough money to pay off their debts in full. A debt settlement typically involves working with a debt settlement company who will negotiate on your behalf with your creditors to come to an agreement about a debt reduction. If your creditors agree, you’ll:

  • Only have to pay off a percentage of your outstanding debt.
  • You’ll make one large payment or your counsellor will arrange a payment schedule.
  • Your debt settlement will appear on your credit report and remain there for 3 years after you’ve finished making payments.

While debt settlement can be a good idea for those is dire situations it’s not always the best choice. Debt settlement is often seen as a negative thing as you don’t end up paying all the money you owe and it can negatively affect your credit.

Learn how to negotiate your deb settlement on your own

Consumer Proposal

A consumer proposal is a legally binding debt relief solution that is managed by a Licensed Insolvency Trustee (LIT). The process involves your LIT offering a “proposal” to your creditors. The goal of the proposal is to settle your debts for an amount that is lower than what you owe and/or extended the term of your loan. If your creditors agree to the proposal, you’ll make single monthly payments to your LIT, who will distribute your payments to your creditors. However, your debts must be payable within 5 years, if not you won’t be eligible for a consumer proposal. It is also important to note that you can only clear unsecured debts upto $250,000 with a consumer proposal. 

Advantages Disadvantages
You can clear your debts by paying off a portion of the amount you owe. You can only clear your unsecured debts up to $250,000.
It is a legally binding contract. Your creditors cannot back out once they’ve agreed. Filing for a consumer proposal will negatively affect your credit.
You’ll get a credit rating of R7 which can stay on your credit report for up to 6 years.
You’ll be free of unsecured debt in 5 years or less. 
Unlike a bankruptcy, your assets are protected from being sold and used to repay your creditors.

Bankruptcy

Bankruptcy is the most extreme debt relief option and therefore should only be considered for the most extreme financial situations. Bankruptcy is a legal proceeding and is overseen under the Bankruptcy and Insolvency Act. It provides debt relief to those who cannot pay off their outstanding debts by ending the legal actions of their creditors. Even if bankruptcy is your only option there are still many disadvantages, here are a few you should prepare yourself for.

  • Most of your assets will not be exempt from the bankruptcy process. Real estate and items like jewelry, cars, and furniture may have to be surrendered in order to pay your creditors.
  • Your credit history will take a hit; after your bankruptcy is discharged it will remain on your credit report for 7 years. This will make it difficult to get a loan, a mortgage, and even a credit card. You should also expect to be offered above average interest rates.
  • All open credit accounts will be frozen once you start the bankruptcy process and then closed once your bankruptcy has been discharged. Once your bankruptcy is complete you can apply for new credit but again you may have trouble being approved.

Bottom Line

When debt starts negatively impact your life, it’s important to take action before it completely ruins your finances. Seeking help with a credit counsellor is one of the best things you can do to get your finances back on track. They can not only help you evaluate your finances, they’ll also provide you with the best solution to your problems. From mere advice on managing your debt to instructions on how to file for bankruptcy. Choosing the right debt relief option is a difficult decision to make, but being as informed as possible can and will help make the process that much smoother.


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