Dealing with debt can be annoying, no matter where you live in Newfoundland and Labrador. Then again, it’s even worse when your debts get ahead of you and you’re forced to think outside conventional means of payments, like your income or credit cards. If this is the case for you, a debt settlement might be a solution that will help you avoid declaring personal bankruptcy, so it’s definitely worth a shot. Interested? Good, because we have the information you’re looking for.
Knowing When Debt Settlement is the Right Option
A debt settlement in Newfoundland and Labrador is an agreement that you can negotiate with your lenders when your consumer debt becomes unmanageable and you have no chance of paying them back in full. If they agree (they have the right to decline), you’ll be able to pay back only a percentage of what you owe, rather than the full amount. The hope is that your debt will be reduced to the point where you can pay it off in one lump sum. When the settlement is over, you can walk away and go about repairing your finances.
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However, it’s best to realize that these settlements are not for everyone in Newfoundland and Labrador, as they aren’t always easy to qualify for and can cause damage to your financial profile. In fact, you should only consider a debt settlement when:
- You can give your lenders legitimate proof that your savings and income are not sufficient enough to pay them back in full.
- You’re at least $10,000 in debt, which is the standard for qualification.
- You need to reduce the number of payment dates, interest, and late fees that you’re getting from multiple outstanding credit accounts.
- You’re financially strong enough to afford the lump sum payment that the lenders will assign you.
- You’re able to survive without credit for several years following the completion of your settlement.
- Most of your debt is unsecured (involves no collateral), such as:
- Credit cards
- Personal lines of credit
- Bills from your unpaid utilities, cell phone plan, internet/cable, etc.
- Unsecured personal, short-term, bad credit, and installment loans
Note: Before you apply, be aware of the debts that cannot be included in a debt settlement. Generally speaking, only unsecured debts are eligible. Any secured debts, where collateral is involved, are usually off the table. This includes your mortgage, home equity loans or HELOCs, as well as any of the loans listed above if you’ve secured them with collateral.
For a more detailed explanation of secured and unsecured credit, look here.
What a Debt Settlement Does to Your Credit
That brings us to our next point that you should take into account before you apply for debt settlement. Like most financial products in Newfoundland and Labrador, your debt settlement will affect your credit in various ways. Unfortunately, it’s more of a negative effect than a positive one, at least to begin with. That’s because:
- When your debt settlement is over, your credit score will have decreased and a record of the settlement will remain on your credit report for several years.
- If you apply for new credit during that time, your potential lender can request your score and report from one of Canada’s credit bureaus (Equifax or TransUnion). They’ll then see your lowered score and debt settlement record and may decide that you’re not worthy of new credit.
- If you are approved, your interest rates will be very high, possibly unaffordable.
- The more times you apply, the lower your score will get because hard credit inquiries (done by lenders) also decrease your score. Those inquiries also stay on your report, and each one makes you look more irresponsible, especially if you’ve applied more than once and were denied every time.
- You’ll then have to work even harder to improve your credit after your debt settlement is over, which can take lots of time and hard work.
Interested in more information about your credit score? Click here.
The Silver Lining
This is why you’ll need to be sure you can get by without credit products in Newfoundland and Labrador until your settlement is over and you’re able to get back on track financially, especially if your credit cards have already been put in charge-off status for being unpaid.
That being said, there is a silver lining to any debt settlement. The more of your outstanding debts you manage to pay off, the easier it will be to get your finances back to normal once the whole ordeal is over. By reducing your debts, you’ll also make it easier to handle your payments if and when you do apply for new credit products in the future. And, by making full, on schedule payments for those new products, you’ll be slowly increasing your score again and improving your credit profile as a whole. It’s far more beneficial to deal with your debt immediately and suffer through a few years of bad credit than be in debt your whole life.
These programs can also help you rebuild your credit.
Other Options in Newfoundland and Labrador
Before you finally decide that a debt settlement is the most effective path for your situation, consider some of the alternatives that are available to borrowers in Newfoundland and Labrador, including but not limited to:
- Borrowing from friends and/or family
- Debt consolidation loans
- Debt consolidation programs
- Taking out a loan or line of credit against your home equity
- Filing for a consumer proposal
- Filing for bankruptcy
Each of these debt solutions, while viable for many people in Newfoundland and Labrador, can also be harmful to your credit and finances in more ways than one, particularly when it comes to a consumer proposal or a bankruptcy. Always speak to a professional financial advisor or seek out credit counselling in Newfoundland and Labrador before you decide on a debt settlement or any other debt alternative.
The Two Main Types of Debt Settlement
There are two types of debt settlement that Newfoundland and Labrador borrowers can choose from. Again, talking to an advisor or counsellor should make your choice easier.
Negotiating On Your Own
If you’ve researched the debt settlement process and are confident that you can strike a deal with your lenders without any outside help, you can try this route. Here, you’ll have to prove with absolute certainty that paying your full balance would be possible. You may have to provide bank statements, paychecks, and records of your other outstanding debts. Your lenders might also inspect your credit just to be sure. If everyone is on board, the settlement can go through.
For more information about negotiating a debt settlement by yourself, read this.
Using a Debt Settlement Company in Newfoundland and Labrador
As the whole process can be a bit complex to deal with on your own, you might also want to consider hiring a debt settlement company in Newfoundland and Labrador. Some lenders may not be open to negotiating with you when you’re by yourself. However, a debt settlement company can ease the process along and negotiate the deal for you. By hiring this company, you may also be showing your lenders that you’re serious about paying them back, which will put you back in their good graces.
Check out this infographic to learn how to create a debt repayment plan.
Pros and Cons to a Debt Settlement
Before you make your final decision, let’s talk about some of the other pros and cons to choosing a debt settlement over other alternatives. Remember, debt settlement is not for everyone in Newfoundland and Labrador. Your own financial situation might be different from other borrowers in Newfoundland and Labrador, so it’s best to be cautious and consider all factors.
Pros
- Your debt-to-income ratio will be lowered, which increases your credit.
- You’ll be out of debt quicker and can save your money for other financial issues.
- Once you’ve proven that you can deal with a debt settlement, you can show future lenders that you’ll be dedicated and responsible with financial products.
Cons
- The resulting financial and credit-related damage can take months, maybe even years to repair in full.
- If you can’t afford your lump sum payments, plus all your other expenses, a debt settlement may just put you further in debt.
- Scammers may establish fake debt settlement companies, hoping that your desperation will make you slip up and give away your financial/personal information, ultimately causing even worse financial problems for you.
- Even legitimate companies cannot force your lenders to accept the debt settlement, nor can they prevent them from pursuing legal action against you.
Take a look at some other debt management products for credit users.
Debt Settlement is a Way Out
Despite all the different factors to consider, debt settlement in Newfoundland and Labrador might be the best course of action for you. If you’re interested in this route or you’d like more information about it, contact Loans Canada today!
