If you are struggling with debt, you may need debt forgiveness as opposed to a repayment plan. Determining this can be assessed by answering three questions:
- Are you barely making the monthly minimum payments on your debts?
- Are your debt balances increasing because you borrow more each month to pay bills?
- Are you missing payments or borrowing from payday loan companies because your existing debts cost too much?
If you answered yes to any of these questions you are a likely candidate for debt forgiveness.
What is debt forgiveness and what options are available?
Debt forgiveness is the partial or total reduction in the amount you owe. Creditors agree to cancel part or all of your financial obligation in exchange for a new payment plan.
If you have a lot of debt and are seeking debt forgiveness you have probably determined that you cannot budget your way out of debt. You may have been denied or determined you do not qualify for a debt consolidation loan. Both options can help you manage your debt, but they do not reduce the total amount you are required to repay.
There are only three reliable debt forgiveness programs in Canada that provide some form of payment forgiveness.
Debt Management Plan
A debt management plan, or DMP, is technically not a debt forgiveness program. It is a repayment plan. It does provide interest relief, but you must repay the full amount of the principal owing.
Calculating your payments in a DMP is easy: you take the total amount of your current debts to be included in the plan and divide them by the number of years to repay. If you can afford to, your credit counsellor may recommend a three-year plan. If you cannot afford that much, they may recommend you stretch those payments over a period of up to five years.
Debt management plans, offered through not-for-profit credit counselling agencies in Canada, can deal with simple consumer debt like credit card debt, bank loans and bill payments. A DMP cannot help if you have student debt, tax debt or payday loans.
Participation by your creditors is also voluntary. If one creditor does not want to write-off a portion of your debt, they can opt out. This is why payday loan companies typically do not agree to join the program.
The only formal, legal, debt forgiveness program available in Canada is a consumer proposal.
A consumer proposal is a debt settlement program governed by the Bankruptcy & Insolvency Act and administered by Licensed Insolvency Trustees.
Your trustee will meet with you to determine how much you can afford to repay. With this information, they will help you negotiate a settlement offer with your creditors. While your exact payment will depend on what you own, how much you make and even who your creditors are, settlement discounts of up to 80% of the total amount owing are not uncommon.
Find out what your payments might be. Try our debt forgiveness options calculator.
A consumer proposal is binding on all unsecured creditors. It results in the elimination of most unsecured debt including payday loans.
Student debt forgiveness
If you are struggling with student loan debt, begin with the government’s Repayment Assistance Program. If this is not enough, or you have other unsecured debts, a consumer proposal is a viable option for student loans. Student debts are forgiven if you have been out of school for 7 years.
Tax debt forgiveness
Even Revenue Canada must abide by the terms of an accepted proposal which means it does eliminate CRA tax debts like HST, source deductions and income tax.
Secured debts, like your mortgage or car loan, are not included in a consumer proposal. Most people opt to continue their payments and keep their home or car. If, however, you determine that you cannot afford your vehicle payments, for example, you can surrender your vehicle and any shortfall will be forgiven as part of the proposal.
If you cannot afford to make an offer to your creditors to repay part of your debt, you may need to consider filing bankruptcy. In a bankruptcy, your creditors forgive or write-off your debts, in exchange for which you surrender non-exempt assets and make monthly payments based on your income.
Do I have to include any cancelled debts written off on my income tax? No. This only applies to corporations in Canada. Your personal debts are forgiven as part of a bankruptcy or proposal and you have a fresh start.
Should I worry about my credit report?
All debt forgiveness programs in Canada will appear on your credit report.
Both a DMP and a consumer proposal will appear on your credit report as an R7 repayment plan and will remain on your report for 3 years after completion. A bankruptcy will appear as an R9 and will remain for 6 years after discharge.
However, if you answered yes to the three questions at the top of this post you likely do not have good credit anyway. Even if you have a good credit score today because you haven’t missed a minimum payment, you can’t borrow any more because you have too much debt now. A debt forgiveness program allows you to reset the clock so you can improve your budget, save money and rebuild a better credit history for tomorrow.
Be wary of questionable debt forgiveness providers
Debt settlement companies have largely disappeared in Canada due to changes in regulations in recent years.
There are, however, companies advertising government debt relief programs who are not regulated to do so. They promise to help you through the process and charge a significant fee up front to collect information.
Never pay an up-front fee for any debt forgiveness program. Licensed Insolvency Trustees across Canada offer unlimited free, no-obligation consultations.
What to do next
If you are having trouble keeping up with your debt payments, know that ignoring the problem and borrowing more money isn’t the solution. Contact a local Licensed Insolvency Trustee today. We’ll help you explore your debt forgiveness options so you can become debt free.