All forms of debt settlement appear on your credit report in the same way. They are listed as an R7 to show that you have entered into some form of settlement agreement for the debt. This agreement might be a debt settlement plan, a credit counselling plan or a consumer proposal. That means that initially, all debt settlement programs affect your credit rating the same way.
We review which option can help you start the recovery process sooner, but to start let’s take a look at the three most common debt settlement programs available in Canada.
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Informal Debt Settlement: The least likely to work and the most risky
Informal debt settlement plans offered through unlicensed debt coaches or debt consultants are not regulated and may be administered by anyone willing to set up such a company. Most informal debt settlement options don’t work.
Recently, Ontario has taken steps through the Collection and Debt Settlement Services Act to ban such companies from charging their fees “up-front” before they actually settle your debts. However, some companies have switched their business model, selling consumer proposals (even if they don’t call them that) and charging the debtor a fee for advice then sending them to a licensed insolvency trustee once they are paid. You should NEVER pay for a referral to a licensed insolvency trustee since all reputable trustees offer free consultations.
Bank’s also don’t like informal debt settlement programs and most will not participate.
Credit Counselling Plans: Pooling debts and managing payments
Credit counselling agencies offer a program called a debt management plan. A debt management plan allows you to pool your debts together and make one monthly payment to the credit counsellor.
Debt management plans do not settle your debts. You must repay your debts in full if you choose a debt management program. It is possible to reduce or freeze any new interest but you still pay all of the original debt over a period of 48 to 60 months.
If you have the ability to repay 100% of your debt then credit counselling as a viable option.
Choosing the credit counselling route does not mean your credit report will not be affected. A DMP will still appear on your credit report as an R7 and this will remain for 3 years.
Because you are required to repay 100% of your debts, your monthly payments will be higher than they will be through a consumer proposal offered through a Licensed Insolvency Trustee. This may limit your ability to build savings which can go a long way towards making you more credit worthy once the program is complete.
Consumer Proposal: Legal debt settlement through a licensed insolvency trustee
A consumer proposal is a legal procedure where you repay a portion of what you owe over a maximum of five years.
Most proposals allow you to settle your debts for about one third of what you owe. The result is that your monthly payment is much lower than it would be in any other debt settlement program. This is just one of the benefits of a consumer proposal over most other programs.
Again, the credit report impact of a consumer proposal and debt management plan are the same. However in a consumer proposal you pay less. This makes it easier to build an emergency fund and save a larger down payment for purchases like a car or house after your program is completed.
Only licensed insolvency trustees (the new designation for bankruptcy trustees in Canada) may administer a consumer proposal, so before you sign any agreements to pay, make certain you are dealing directly with a licensed trustee and not a debt consultant that will pocket your money and refer you elsewhere.
When considering your debt relief options, getting out of debt should be your priority.
You should consider which option will allow you to eliminate your debt for the lowest cost.
For some individuals that does mean filing bankruptcy particularly if you have no assets and a lower income.
If however your income is above the surplus income threshold, or you have assets that you might lose in a bankruptcy, then a consumer proposal may be a better choice. With a consumer proposal you are spreading the cost of your insolvency over a period of time (lowering your monthly payments) and preserving assets you might want to keep against the quicker alternative of a bankruptcy.
A lower monthly payment through a consumer proposal can help you balance your monthly budget so that you are able to rebuild your finances even while you are still in the program. Many people find they are able to start to save money while in a consumer proposal because their monthly payments are significantly less than they were on their debts before they filed.
The key is to focus on the future rather than the past. Decide where you want to be, not on where you’ve already been, and choose the best way to get there.
This is where a debt assessment with a Licensed Insolvency Trustee is useful. We can help you review all these options based on your specific debts, your income and your priorities. Contact us today to book a free consultation so we can give you a plan to be debt free.