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Does thinking about your debt leave you feeling hopeless? Then your debt may have gotten out of hand. Thankfully, there are many debt relief solutions available in Canada to help you get your debt back under control. 

Some debt relief options you can consider are a debt management program (DMP), a consumer proposal, a bankruptcy or a debt settlement. While a DMP, consumer proposal, and bankruptcy are a more extreme form of debt relief, a debt settlement is a more amicable approach.

Settling Debt With A Debt Settlement

A debt settlement is particularly useful when your debts are too high to consolidate. Through it, you’ll be able to reduce the debt you owe by negotiating with your creditors. The goal is to clear your debt by paying off a percentage of what you owe. 

For example, if you have $7,000 of credit card debt, you can negotiate with your creditor so that they allow you to clear your debt by making an upfront payment of $4,000. 

How Do You Negotiate A Debt Settlement Deal With Your Creditors?  

While you can negotiate a settlement with creditors yourself, it’s generally better to hire a debt settlement company as it shows your creditors you’re serious. However, the key to a successful debt settlement is choosing the right company to work with

Unfortunately, there are countless fraudulent debt settlement companies, so it’s extremely important that you first do your research and find a legitimate company to work with.

Questions to Ask Your Debt Settlement Company

To help better assess the legitimacy of a debt settlement company here are the most important questions you need to ask.

1. How Much Do You Charge?

Debt settlement companies are notorious for their high fees. Be sure to ask your lender for all the fees involved so you know what you’re getting yourself into. Some may need require advance fees while others may charge you after they’ve completed their services. 

You should also be aware that if the debt settlement company fails to negotiate a deal with your creditors, they may still charge you for their service. As such, always ask for written disclosure of the fee you are expected to pay before signing any agreement.

Having trouble with high-interest debt? Check out how to pay off high-interest debt.

2. How Long Has Your Company Been in Business and How Much Debt Have You Settled? 

Experience is important when it comes to choosing a debt settlement company to negotiate with your creditors. A debt settlement company that boasts of being the best in the market, but has nothing to show isn’t always the best company to work with. Similarly, a young company may lack the experience needed to deal with your creditors properly. 

3. Can You Guarantee That My Creditors Will Stop Calling Me?

This is a great question to sniff out fraudulent debt settlement companies. Companies that claim they can stop your creditors from calling you, that’s a red flag right there. No debt settlement company can guarantee you that they can stop all your creditors from contacting you. A debt settlement is a non-legally binding agreement that a creditor can choose to accept or reject for any reason. 

Find out what can a collection agency do to you in Canada.

4. Do You Make Monthly Payments To My Creditors?

If you find a debt settlement company that guarantees you they’ll make monthly payments to your creditors on your behalf, think twice. The whole appeal of a debt settlement for a creditor is that you’ll be providing a large lump sum of cash instead of minimum payments over several years. 

5. Is There A Possibility I Will Get Sued?

Yes, there’s a possibility you could get sued by your creditors. If you have many different creditors you need to settle a debt with, it can take months and even years before all your debt is settled. The more time it takes the greater your chance of being sued by one of your creditors. If a debt settlement company “guarantees” that you won’t get sued, take that as a red flag and look for a different company. 

Are you being harassed? Learn how to stop collection harassment in Canada.

6. When Can I Expect My Debt Settlement To Be Completed?

While no debt settlement company can give you an exact date, they should be able to give you a time frame on when your debts will be settled. In general, the time will depend on the amount of debt you have, how much you can save and who and how many creditors they need to deal with. Everyone’s situation is different so everyone’s debt settlement process will be different, try not to compare your settlement to anyone else’s.

7. Will My Credit Score Be Impacted?

A debt settlement will negatively impact your credit score. When you settle your debt you aren’t required to pay back the full amount you owe, this shows that you weren’t able to properly handle the credit given to you and therefore your credit score will take a hit. Your credit report will show that the account was settled for less than what was owed and will stay on your credit report for up to 7 years. However, the impact won’t be as bad as a consumer proposal or a bankruptcy. 

8. Who Will Hold My Money While Settling My Debts?

Don’t settle with anyone opting to hold your money for you. While waiting for your debts to be settled, your money should be held in a third-party escrow account where you have full control and the freedom to close the account any time you want and can also get your money back without risking any penalty charges.

9. How Often Will You Update Me On The Situation?

Don’t settle for anything less. A debt settlement company that practices transparency will always update you on their negotiations with your creditors. They’ll also make sure that you understand every step of the process. 

Alternatives To Debt Settlement

Exploring all the debt relief options available is key to making an informed decision. It will help you choose an option that is ideal for your situation. If you want to contact a credit counselling agency to weigh your options before shaking hands with a debt settlement company, they should be supportive of your decision. 

A debt settlement company that tries to pressure you or discourage you from looking at other alternatives usually means that they are motivated by their own self-interests.

Consider Your Options

Being harassed daily by your creditors is no way to live, that’s why if you are currently experiencing this issue you need to consider all your debt-relief options, including debt settlement. Depending on your situation one will offer you better results than the other. Debt settlement will allow you to negotiate your debts and pay them off so you can live a debt-free life.

Debt Settlement Faqs

Are debt settlement companies regulated?

Debt settlement companies are regulated by provincial and federal governments. If you believe they’re acting unethically, you can submit a complaint by contacting your local consumer affairs office.

How much can you debt can you settle?

The amount of debt you can settle during a negotiation depends greatly on the creditor and the case you make. Most lenders will be willing to negotiate an amount that is higher than what they would receive if you were to file for bankruptcy or a consumer proposal. 

What are some alternatives to a debt settlement? 

If your debt payments are unaffordable, consider consolidating them and spreading them over a longer period of time. You can do so with a debt consolidation loan or through a debt management program if you can’t qualify for a loan or secure a low-interest rate.
Caitlin Wood, BA avatar on Loans Canada
Caitlin Wood, BA

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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