There are many forms of debt relief in Canada. Each has their own benefits in terms of interest relief, settlement of debts and costs. Beyond this, different debt relief options carry different risks. Are you dealing with a licensed debt professional? What legal protection is available and more importantly, when does it kick in. What is the potential success rate of obtaining debt relief and what impact will each debt management option have on your credit report?

Below is a comparison of 5 debt relief options (credit counselling, consolidation loan, debt settlement, bankruptcy or consumer proposal) along 6 different risk categories:

  • Licensing
  • Cost
  • Legality
  • Creditor Protection
  • Credit Score Implications
  • Success Rate

You can see a summary of this information in a handy infographic on debt relief options at the end of this post.

Is Your Debt Professional Licensed?

No matter what debt relief option you choose you should always ask about the qualifications and credentials of the debt expert you are working with. They should be members in good standing of some accredited association which requires their members to be trained and in good standing.

  • Credit counselling agency should be licensed with a reputable provincial or national association (such as the Canadian Association of Credit Counselling Services, Credit Counselling Canada, or Ontario Association of Credit Counselling Services.
  • Individual credit counsellors may or may not be certified or trained to discuss all debt relief options. Unfortunately, this applies to both for-profit and not-for-profit credit counselling agencies. Not only should the agency be accredited, but so should the individual counsellor you are working with.
  • Bankers and lenders offering debt consolidation loans are not certified but you should still ensure you are dealing with a reputable lending institution. Be aware of the many low credit debt consolidation companies that offer what seem like easy debt consolidation options than can end up costing you much more in the long run.
  • Debt advisors and debt consultants or debt settlement companies are not licensed. Anyone offering debt settlement services in Ontario must be registered pursuant to the Collection and Debt Settlement Services Act. Lawyers, not-for-profit credit counsellors and licensed insolvency trustees are exempt from this requirement.
  • Licensed insolvency trustees are the only debt relief professionals licensed by the federal government. In addition, they are the only debt relief experts able to file a bankruptcy or consumer proposal.

How Expensive Is Debt Relief?

It is not possible to just walk away from your debts. Each debt relief option requires that you make some form of payments. What those payments will be, and what they cover differ for each alternative.

  • Most expensive. Debt settlement through a debt consultant and debt consolidation tend to be the most expensive debt relief alternatives. Debt settlement consultants charge large fees with a low success rate. Debt consolidation interest rates vary and extra fees may apply.
  • Mid-range cost. A debt management plan requires that you repay 100% of your debt. Credit counsellors earn a fee of 10% of your payments, plus receive additional funding from creditors.
  • Least expensive. A bankruptcy or proposal usually provide the cheapest option in terms of total payments. A consumer proposal often results in the lowest possible monthly payment. Trustee fees are included in your debt relief payments (no extra fees apply) and all fees are federally regulated.

Is the Debt Relief Program Binding?

Not all creditors will participate in any program, and not all debts can be covered.

  • A debt management plan is a voluntary agreement. It is not binding on any creditor. Failing to complete a DMP often results in the cancellation of any interest relief. Tax debts cannot be included in a debt management plan and most payday lenders won’t participate in any voluntary debt relief program.
  • To qualify for a debt consolidation loan, you may have to provide security through a second mortgage for example or may need a co-signer. Failing to make payments can put your assets and your co-signer at risk.
  • Beware signing any contract with a debt consultant. Read the fine print carefully. Many require you to pay large up-front fees and creditors are not bound by any terms. You may pay significant fees without achieving any debt relief.
  • Any procedure filed with a Licensed Insolvency Trustee is a legal process under the Bankruptcy & Insolvency Act. It is legally binding on your unsecured creditors.

What Legal Protection Do You Have?

There are two factors to consider here: how much protection from creditor actions you receive under your debt relief program and what your legal obligations are.

  • Credit counselling does not protect you or stop creditor actions. Creditors must agree and any creditor can continue to call or pursue a wage garnishment. Failing to complete a DMP often results in the cancellation of any interest relief.
  • Informal debt relief options like debt settlement provide no protection from creditors actions. Creditors can, and will, pursue further legal action before you can reach any agreement.
  • Only a bankruptcy or consumer proposal provide immediate protection from actions taken by your unsecured creditors. Collection calls, court actions and wage garnishments stop.

How Does Debt Relief Affect Your Credit Score?

All debt relief options affect your credit score to varying degrees.

  • A debt management plan appears on your credit report and remains for 2-3 years after completion.
  • Multiple applications for a debt consolidation loan, and high debt balances, will negatively impact your credit score. This will improve only if you pay down your debt.
  • Debt settlement will damage your credit particularly if you are advised to stop making payments while the debt consultant attempts to negotiate debt relief.
  • A first time bankruptcy will remain on your credit report for 6-7 years after discharge (which can happen as early as 9 months)
  • A consumer proposal will remain on your credit report for 3 years after completion (similar to a debt management plan)

How Successful Is a Debt Relief Program?

Your success rate will vary by provider and by your commitment to the program.

  • Credit counselling agencies report a success rate which can range from 20% to 99% depending on how affordable your payments are and whether or not they deal with all of your debt problems.
  • The Canadian Bankers Association states that only 10% of debt settlement programs are accepted by creditors.
  • Most personal bankruptcies in Ontario end in 9 months with full discharge from debts.
  • At Hoyes Michalos, 99% of proposals are accepted by creditors.

If you are looking for debt relief and a debt management solution that fits your situation, talk to one of our licensed insolvency trustees. We can explain all the risks and benefits of each option based on your individual circumstances.

Talk To A Licensed Insolvency Trustee Today

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