In this video, Doug Hoyes, co-founder of Hoyes, Michalos & Associates, discusses the pros and cons of 5 key debt management solutions that can help you eliminate your debt.
You’ve got debt problems. Maybe you’re just barely making the minimum payments every month or maybe you’re getting calls from bill collectors and you’re worried that your wages might be garnisheed. What can you do? You’ve got five basic options.
First, you could do nothing. Of course, if you do nothing the collection calls continue and you risk having your bank account seized, your assets taken, and having your wages garnisheed.
However, if you have no assets and if you have no wages – perhaps because you’re unemployed or on a pension, doing nothing might be the right answer. You could open a new bank account at a new bank, change your phone number and just ignore the letters. Doing nothing doesn’t make your debts go away, but if the people you own money to can’t get to you, it’s a cheap and effective option and occasionally it’s what I recommend for someone with no assets and no employment income.
Second, you could deal with your debts on your own. You could make a budget, cut your expenses, get a second job and work to pay off your debts on your own. If your debts are manageable and if you have the ability to increase your income or reduce your expenses, dealing with it on your own is a great idea.
You could get a get a debt consolidation loan to reduce the interest you’re paying and get out of debt faster or maybe you can refinance with a second mortgage. Even better, if you have assets to sell, you might be able to sell your car or house or cash in investments and pay off the debt. If you’ve got assets, that may be the best option.
Third, you can get help from an outside agency and do a debt settlement or credit counselling or a debt management plan. Before you go this route, make sure you know who you’re dealing with. Credit counsellors do debt management plans where you repay your debts in full, but generally at a reduced or zero interest rate. If you’re talking to a not for profit counsellor, ask them if they are a member of the Ontario Association of Credit Counsellors or whatever governing body exists in your area.
Over the years I’ve worked with a lot of great not for profit credit counsellors and I highly recommend them to many people. However, there are lots of unscrupulous people out there calling themselves credit counsellors, but they have no qualifications whatsoever. They spend lots of money on advertising, but all they do is take your money and then refer you to a Trustee to go bankrupt. If you want to find out if someone is legit, do a search on the Internet or check out the Better Business Bureau or give my office a call, we’ll tell you.
A debt settlement is a bit different than a debt management plan. In a debt management plan, you repay your debts in full. In a debt settlement, you settle your debts for less than the full amount owing. Debt settlements typically work best when you have a lump sum of money that you can offer. If you have a debt that you haven’t made any payments on in a year or more and if you’ve got some cash, you might be able to make a deal where you pay 50 cents on the dollar or maybe less to wipe out the debt.
If you owe money to lots of different companies, you need to make a deal with each of them which takes time. Of course, if you’re only a month or two behind, it’s less likely your creditors will settle for such a small amount. If you’re working it’s more likely they will want to keep calling you and perhaps even take you to court. So debt settlement only works in very specific situations. So what can you do if you can afford to pay something, but can’t pay in full, you don’t have a lump sum of money and you want to work out a plan to deal with your debts?
The fourth option is a Consumer Proposal. This is a legal procedure governed by Federal law. We figure out what you can afford to pay and then we propose it to your creditors. So if your total debts are $50,000 on credit cards, bank loans, payday loans, and even income taxes, you might offer to pay $20,000 – perhaps $400 a month for 50 months. Each creditor – that’s everyone you owe money to – gets one vote for every dollar you owe and if more than half of the dollars vote in favour, everyone has to take the deal. That’s why a Consumer Proposal is often better than other options.
In a debt management plan or a debt settlement, if one of the creditors says, “No,” you’ve got to deal with them yourself. In a Consumer Proposal, if more than half of the dollars say, “Yes,” everyone else is forced to take the deal.
What if you can’t commit to a three or four or five year repayment plan? The final option is bankruptcy. You still have to pay something each month, but a first bankruptcy generally lasts for either 9 months or 21 months depending on your income. You lose your tax refund and other assets and you’re required to submit proof of your income to the Trustee each month. But if you have no other choice, bankruptcy is the final option.
Which option is right for you? It depends on your unique situation. So when you call us at Hoyes Michalos we’ll review all of the facts, explain all of the options, and we’ll help you decide which option is right for you.