There are a few different ways available to Canadians to resolve debt trouble. 5 options are listed here:
Personal Bankruptcy:
When you declare personal bankruptcy you surrender everything you own to a trustee in bankruptcy in exchange for the elimination of your unsecured debts. Personal bankruptcy is a legal process, governed by federal law (the Bankruptcy & Insolvency Act). To go into bankruptcy in Canada, a person must live or do business in Canada, and must be insolvent. To be insolvent means:
- To owe at least $1,000.
- Not to be able to meet your debts as they are due to be paid.
Bankruptcies generally do not affect the rights of secured creditors, i.e., those who have a valid security against your property, such as a car or a house.
There is a required process you and your Bankruptcy Trustee must abide by in order to file for personal bankruptcy. For details of this process, click here. During the bankruptcy, you will also be required to make payments to your trustee for distribution to your creditors. The trustee determines how much you will be required to pay. He or she calculates the amount by taking into account your total income, income standards issued by the OSB, and your personal and family situation.
At the end of the process, a first-time individual bankrupt is usually discharged from debts after nine months
Cons for Bankruptcy: Depending on how many times it has been legally declared, a bankruptcy will remain on your credit rating or score for a minimum of 6 years up to 14 years. Through a bankruptcy you cannot obtain credit again for 6 or 7 years. With a bankruptcy program, you do not have any flexibility on what you want to pay, nor can you prioritize or exclude any creditors. Furthermore, if you miss any payments the bankruptcy program will become null and void.
Consumer Proposal:
A consumer proposal can be submitted to creditors only if an individual’s total debt does not exceed $250 000, not including debts secured by their principal residence.
A consumer proposal is a formal process that is carried out through a trustee in bankruptcy. The trustee puts together an offer to pay creditors a percentage of what is owed to them over a specific period of time, or extend the time the debtor has to pay off the debt, or a combination of both. Payments are made through the trustee, and the trustee uses that money to pay each of the creditors. The debt must be paid off within five years.
Cons for Consumer Proposal: With a Consumer Proposal, you do not have any flexibility on what you want to pay, nor can you prioritize or exclude any creditors. Furthermore, if you miss any payments the bankruptcy program will become null and void.
Debt Consolidation:
A debt consolidation loan is a single loan (generally from a financial institution) that allows you to repay your debts to several or all of your creditors at once. You are then left with only one outstanding loan — to the financial institution. In addition to streamlining your debts into a single payment, a debt consolidation loan may also offer you an interest rate that is lower than that charged by your creditors saving you money in interest charges. This option can be especially attractive if you have outstanding debts at a relatively high rate of interest (for example, those charged on some retail store cards or credit cards). You must ask your financial institution for a loan equal to the amount of your total outstanding debts that are currently due. In most cases, the financial institution will settle all the debts for you and, in return, the only monthly payment you will have to make will be to them.
It does not cost anything to apply for a loan in order to consolidate all your debts. However, a fee may be charged to open your file. Inquire at the financial institution that you choose.
Contact several financial institutions before you choose a consolidation loan since the interest rates offered by competing financial institutions may vary.
Cons for Debt Consolidation: In most cases, the amount to be paid and/or the length of time increases, in order for you to make one easy payment per month. This means you’ll be paying back more money in the long run. This can also involve attaching more collateral, or having to obtain a co-signer to take responsibility for the loan.
Debt Settlement:
Debt settlement is a service in Canada to help individuals who are experiencing financial distress, and is an alternative to bankruptcy.
Debt settlement might be appropriate for you if you meet the following three criteria:
- You are solvent;
- You have more than $10,000 in unsecured consumer debt;
(do not count mortgage loans, car loans or student loans); - You have an income or the ability to raise some money.
You can hire a firm to do debt settlement work on your behalf.
During the first few months you enroll in a debt settlement plan you will not make any payments to selected unsecured consumer creditors. During this initial phase you will be saving money that will be set aside to build your ‘debt settlement fund’. With the passage of time (1) the amount of money in your debt settlement fund will grow and (2) your creditors will become increasingly willing to accept lump sum settlements from you. After several months your debt settlement firm will contact your creditors and attempt to negotiate very favourable lump sum settlements.
Cons for Debt Settlement: In Ontario, the debt settlement process consumers go through has come into question. In other parts of Canada and throughout the United States, certain debt settlement practices have been outlawed in the face of criticism and reports that the practices are fundamentally flawed and open to abuse.
Up-front fees are collected before debt settlement companies begin negotiating with or even contacting creditors. Debt settlement firms do not contact your creditors when you start a debt repayment program. Critics maintain that this process creates a high degree of risk for consumers, who are open to abuse by companies interested only in collecting up-front fees before leaving consumers to deal with disgruntled creditors, most of whom are not interested in waiting years to accept a fraction of the original debt. Consumer credit ratings can also suffer in the process.
Debt Relief:
Reputable debt relief companies will offer free financial assessments and assistance with your budget.
All credit counseling, debt settlement and debt relief companies will charge a fee. Each operates as a business, and each requires a fee for a service. Now, how that service is provided sets the reputable companies apart from the rest. Here are some questions to ask the company:
- What is the fee and how long do I have to pay it?
- When will you start negotiating with my creditors?
- Does the process ensure that all debts are considered?
Where debt settlement companies will not start negotiating with creditors until the member has accumulated a sizeable sum in fees, reputable debt relief companies will immediately begin the communication and negotiation process with creditors upon the member’s program commencement. They should negotiate with strength and authority by initiating communication with creditors and ultimately a repayment plan with the consumer’s best interest in mind.
What if you start a debt relief program and you experience a life changing event that prevents you from affording the program fee? Whether it is from divorce, loss of a job or just plain inflation, such a change can cause further stress on your already troubled finances. Some Companies will drop you from the program and you will find yourself, once again, at the mercy of the creditors and collection agencies. A reputable debt relief firm should offer flexibility in paying your program fee. This is something you need to take into consideration before signing up.
Cons for Debt Relief: There are many companies out there that claim they offer debt relief, but few work on behalf of the consumer versus the creditor. Should you choose to go with a debt relief firm, you need to entrust that firm to properly represent you when negotiating with your creditors a debt repayment plan that YOU can afford. Even with proper representation you may still encounter legal action from a creditor. Unfortunately one cannot predict how a creditor may react to any unpaid debt. You need to consider this when choosing this path to resolve your debt. Some firms may include paralegal services with your representation..
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