Debt Relief Guide

Are you struggling with mounting debt, and have tried several avenues to get it under control with little luck? If so, debt relief options can help you regain control of your finances, reduce stress, and give you a fresh start. Discover the programs and strategies available to help you deal with your debt and get back on the path to financial health.

Do You Need Help Managing Your Debt? 

How do you know it’s time to seek out more aggressive measures to deal with your debt? Consider the following:

• You’re Making Minimum-Only Payments. You can only make minimum payments and struggle to lower your balance.
• You Rely On Credit Cards. You depend on credit to cover daily expenses, like groceries and bills, because you feel you have no other choice.
• Creditors Are Calling You. You’re receiving calls from creditors or collection agencies demanding repayment.
• You’re Stressed Out. You feel overwhelmed, stressed, or anxious about your financial situation and growing debt.
• Your Efforts Are Making Little Difference. Despite making payments, your debt still continues to grow.
• You’re Applying For Loans To Cover Existing Debt. You’re thinking about taking on new debt just to pay off existing debt.

Here Are The Best Debt Relief Resources

If you are drowning in debt and need a way out, there are several debt relief options available to Canadian consumers. Depending on your financial situation, you may be eligible for any one of these options:

Debt Management Program (DMP)

A Debt Management Program (DMP) is also known as a debt consolidation program, which is a service that credit counselling agencies provide. You will work with a credit counsellor to consolidate your debts into an affordable monthly payment over a maximum period of five years. 

With this program, you can only consolidate all of your unsecured debts, loans, and lines of credit. It’s also important to note that a DMP does not eliminate debt but paves a path for you to pay off your debt in a far more manageable and affordable manner.

How Does A DMP Work?

1. Your Credit Counsellor Offers A Proposal: Your credit counsellor will make arrangements to speak with your creditors on your behalf to propose a repayment plan.
2. Make Payments: If your creditors agree to the plan, you will start making adjusted monthly payments to your counsellor, who will then pay your creditors accordingly. Your adjusted payments will likely be lower due to a reduction in your interest rate and/or the increase in the payment period.

Things You Should Remember Before Entering A DMP

• Creditors Can Opt Out: A DMP is an informal process and not legally binding, so creditors have the right to contact you and withdraw from the agreement if they choose to. However, most won’t if you stick to your program.
• Credit Impact: A DMP will be reflected in your credit report for two years after you finish the program, which can negatively impact your credit.

Debt Consolidation Loan 

A debt consolidation loan allows you to combine all of your outstanding debt into one singular monthly payment. You can consolidate your debt by working with a bank, credit counselling agency, or any other financial institution that will give you a loan to pay off all of your debts.

How Does Debt Consolidation Work?

1. Assess Your Debt: Review all your debts to understand the total amount you owe and the interest rates.
2. Apply For A Consolidation Loan: Fill out and submit your application, providing necessary documentation needed for approval.
3. Pay Off Existing Debts: Once approved for a debt consolidation loan, you can use the funds from the loan to pay off your existing debts in full, consolidating multiple payments into one.
4. Make Payments: Make on-time payments on your new, single debt consolidation loan.

Things You Should Remember Before Consolidating Your Debt

• This Works Best When You Can Secure A Lower Rate: For this debt relief method to work, you must make sure that the interest rate on the new loan is lower than that of your previous loans. The whole point of consolidating your debt is to take advantage of a more affordable interest rate, ideally lower than what you were paying with your previous creditors. This decrease in interest will help lower your payments and save you money.
• Your Debt Doesn’t Disappear: It is important to understand that a debt consolidation loan does not eliminate your debt, but helps you manage your payments and decreases your overall monthly payments and interest. If your debt level is so high that you are unable to keep up with the offered monthly payments, you may be declined.
• You Need Good Credit: You must also have a pretty good credit score to be eligible for the loan because these types of loans are typically larger and thus riskier for the lender. So, this debt relief option is best for individuals who maintain the capability to pay off their debt but require some help managing their finances.

Debt Settlement Program

In a debt settlement program, you or a debt settlement representative will negotiate with your creditors to pay back less than the full amount owed. The agreed-upon payment is typically made in a lump sum or via structured payments. 

This option is designed for those facing serious financial hardship who want to avoid bankruptcy but can’t manage their current debt load on their own. 

How Does Debt Settlement Work?

1. Negotiate With Creditors: You (or a debt settlement company) offer creditors a reduced payment than what you currently owe.
2. Remaining Balance Is Forgiven: If accepted, your creditors will forgive the outstanding balance, and you’re considered debt-free from that account.
3. Make Payments: You’ll need to pay your creditors the newly negotiated amount, whether in one lump sum or through regular payments.

Things You Should Remember Before Entering Debt Settlement

• High Fees: Debt settlement companies charge fees, regardless of whether your creditors accept the lower payment offer.
• Not All Creditors May Accept: You’ll need to negotiate separately with each of your creditors, and not all of them may be on board with your proposal.
• Credit Score Hit For Filing To Settle: Simply entering into a debt settlement arrangement will have a negative effect on your credit score, as it will be noted on your credit report. Plus, if you delay payments while negotiating your settlement, it will also negatively affect your credit score.

Consumer Proposal

A consumer proposal is an insolvency proceeding that allows you to pay off a portion of your debt over a maximum period of five years. This is a great alternative option to consider against bankruptcy if you believe you can pay at least a portion of your debt and want to keep all of your assets. 

How Does Consumer Proposal Work?

1. File Your Consumer Proposal: Your consumer proposal will be filed by a Licensed Insolvency Trustee (LIT), who will be the mediator between you and your creditors. They will help calculate the amount of money you will have to pay back based on your income, assets, and the amount you owe.
2. Make Payments: The payments will be made to the LIT, who will then pay off your creditors accordingly.
3. You’re Protected From Creditors: A consumer proposal is considered a legally binding contract between you and your creditors, so creditors can no longer contact you or file any legal proceedings against you once the contract is in effect.
4. Start Rebuilding Your Credit: The sooner you pay off your consumer proposal, the sooner you can start rebuilding your credit.

Things You Should Remember Before Filing A Consumer Proposal

• Your Credit Score Will Suffer: Unfortunately, filing a consumer proposal will taint your credit score for three years after you complete the proposal, but you are also free to start rebuilding your credit.
• Minimum Debt Is Required: To be eligible for a consumer proposal, you must have at least $1,000 dollars in unsecured debt up to $250,000 dollars of secured and unsecured debt altogether.
• You Need To Earn An Income: You must have an income that will allow you to pay off a portion of the debt within the allocated time.

Orderly Payment Of Debt (OPD) Program

Orderly Payment of Debts (OPD) is a structured debt repayment option in Canada that serves as an alternative to bankruptcy. Also referred to as a “consolidation order”, an OPD may be a suitable way for you to deal with your debt issues.

How Does OPD Work?

1. Assessment: A Licensed Insolvency Trustee will help you determine if OPD is suitable for your situation. Eligibility depends on things like your total debt amount, income, and ability to make payments.
2. Proposal: Your trustee will help you develop a debt repayment plan that fits your financial situation.
3. Court Approval: The proposed plan must be approved by the court to ensure the terms are fair and feasible.
4. Payment Period: You’ll make regular payments directly to your trustee, who then distributes the funds to your creditors.
5. Protection From Creditors: You’ll be protected from creditor actions, like wage garnishment or lawsuits.
6. Completion And Discharge: Once you successfully complete the repayment plan, you’ll be discharged, and any remaining unsecured debt is typically forgiven.

Things You Should Remember Before Opting For An OPD

• Impact On Credit Rating: An OPD will negatively affect your credit score and remain on your credit report for years.
• Availability: OPD is currently offered only in Alberta, Saskatchewan, PEI, and Nova Scotia.

Bankruptcy

Bankruptcy is considered a last resort debt relief option. People who file for bankruptcy are those who are completely overburdened by their debt. This includes all forms of debt except for a select few, like student loans. 

However, with bankruptcy, you may lose some of your assets, like your house or car. Further, bankruptcy has a severe effect on your credit rating, which can last for years.

How Does Bankruptcy Work?

1. Work With An LIT: Similar to a consumer proposal, an LIT will handle all the legal proceedings. They will present your file in court, where a judge will dismiss your debt obligations and force a stop to all collection efforts against you.
2. File For Bankruptcy: Your trustee will file for bankruptcy on your behalf.
3. Automatic Stay Of Proceedings: Once your bankruptcy is approved, an “automatic stay” takes effect, which temporarily stops most collection actions by creditors.
4. Asset Liquidation: Your trustee may sell non-exempt assets to pay your creditors. Certain assets may be exempt, like necessary clothing, basic furniture, or some home equity.
5. Distribution To Creditors: The proceeds from any assets sold are distributed to your creditors.
6. Fulfill Your Obligations: You may need to make required payments and submit financial reports.
7. Discharge: Once you’ve completed your bankruptcy, you’ll be discharged, which relieves you of personal liability for eligible debts.

Things You Should Remember Before Filing For Bankruptcy

• Assets May Be Seized: When you file for bankruptcy, not all of your assets are protected — some assets may be seized to pay off your debt, like your house and car.
• Surplus Income May Be Used: Fifty percent of any surplus income will be used as payment toward your debts for up to 21 months, or 36 months if it’s your second bankruptcy. Your surplus income is determined by the Superintendent of Bankruptcy, who creates a table of income limits based on family size.
• Negative Impact On Your Credit: Your credit score will take a big hit. This information will affect your credit score for 6 to 7 years after completing your bankruptcy.

Which Debt Relief Option Is Best For You?

When choosing a debt relief service, it is important to understand your options. If you are unsure of what debt relief option is best for you, you should first speak to a credit counsellor for advice. A credit counsellor is someone who will help you regain financial stability by providing you with advice based on your credit, debt, and income. 

If they believe that a more drastic solution is needed, they will be able to refer you to a Licensed Insolvency Trustee.

Where Can You Find A Credit Counsellor?

Credit counsellors are available all across Canada. Here are a few top-rated agencies to consider:

You can also use the following sources when searching for a credit counsellor: 

• Credit Counselling Canada
• Canadian Association of Credit Counselling Services
• Ontario Association of Credit Counselling Services
• Coalition des associations de consommateurs du Québec (For Quebec)

Questions You Should Ask Before Working With A Debt Relief Professional

When seeking help for your debt issues from a professional, it’s important to ask the following questions. These questions will help you determine if they are the best fit for your needs. 

• What services do you offer? Understanding your available options is important when making a big financial decision. By educating yourself about the services, you won’t be blindly trusting your advisor.
• What are your fees? There are two types of credit counselling agencies you can approach: non-profit credit counselling agencies and for-profit credit counselling agencies. Both require fees, but non-profit credit counselling agencies have a price limit. And if you’re looking into debt settlement, proceed with caution, as debt settlement companies tend to charge very high fees.
• What are your qualifications? In Canada, credit counsellors are not obliged to have credentials in order to provide their services. Hence, why you should confirm if the credit counsellors you are working with are accredited and trained to effectively deal with your unique situation.

Will All My Debt Be Forgiven?

Not all types of debt can be forgiven. These include child support, alimony, and certain outstanding taxes. 

The types of debt that may be forgiven also depends on the type of debt relief option you choose:

Can Creditors Still Come After Me For Old Debt?

Collection agencies in Canada may continue to contact you to collect a debt, but their ability to take legal action is limited by the statute of limitations. This time limit varies by province and generally ranges from two to six years. Once this period has passed, they can no longer take you to court to collect the debt.

That said, not all debt is subject to the statute of limitations. More specifically, this only applies to unsecured debt, like credit card debt or unsecured personal loans. The statute of limitations does not apply to secured debt, like mortgages. 

Further, the limitation period can restart if you acknowledge your debt at any time, such as confirming the debt is yours in writing or making a payment.

Learn more: What Is The Statute Of Limitations For Debt In Canada?

What Happens If I Don’t Pay My Debt?

If you fail to repay your debt when it’s due, you could face any number of consequences:

• Penalty Interest & Fees: Lenders often charge interest rate penalties that are higher than your original rate. They may also charge late payment fees, administrative charges, or collection fees.
• Negative Credit Impact: Defaulting on a loan has a serious effect on your credit score. It’s typically recorded as a missed or late payment on your credit report, which can stay on your credit history for several years.
• Collections: Once a loan is in default, the lender may hand over your account to a collection agency. These agencies can be persistent and aggressive, adding stress to your life. Collections will e noted on your credit report, which also damages your credit score.
• Legal Action: If the debt remains unpaid for an extended period, the lender or collection agency may take legal action against you.

Additional Reading

Good Debt vs Bad Debt

Average Debt By Age In Canada: Mortgages, Consumer & Student Loans

How To Pay Off Debt Faster

Bottom Line

If you’re bogged down by debt, speak to a debt specialist to help you manage money, improve your credit score, and eliminate debt. If you’re interested in being matched with a debt specialist in your area, Loans Canada can help. 

Debt Relief FAQs