Sometimes credit card debt and interest rate spiral out of control, most Canadians find it difficult to keep up with all the payment. Many Canadians rely on consumer credit counselling services to help manage debt. When high credit card debt begins to feel like a challenge, it may be time to get a free evaluation to see if this is an option for you. We provide you with credit counselling basics to get you started on the path to financial freedom.
A credit counsellor, someone who specializes in debt relief, will assess your financial options.
A debt management program will structure your debt in the best way to pay it off quickly.
Step 1: Get a Budget Evaluation
A debt and budget evaluation from a consumer credit counsellor is free. It is like getting a doctor’s checkup for your financial health, mapping out what you make versus what you owe.
A trained credit counsellor evaluates debt, income sources, lifestyle, and budget. They determine your current status and can select the debt solution that makes the most sense for your financial reality.
You can expect your free counselling session to take about 30 minutes; the meeting will happen over the phone. Your consultation will help you understand the different solutions to free yourself from debt. These include:
- Plans for Debt Management
- Loan Consolidation
- Consumer Proposals
- Debt settlement options
- Bankruptcy Services
The counsellor will present a recommendation that is customized to your financial situation. They’ll walk you through the pros and cons of the debt solutions that make sense for your situation and make sure you understand them in detail. The counsellor will guide you to a path that could free you from debt.
Step 2: Join a Debt Management Program
When you need help managing credit card debt and other bills, enrolling in a debt management program is worth considering. Many services are designed for people with the financial means to deal with their debt. But suppose you have a low credit score, a poor debt-to-income ratio (more debt than your income can pay off fairly easily), or are otherwise high-risk. In that case, you may not be eligible for options like a debt consolidation loan. In this situation, you may have to look at consumer proposals, debt settlement or even the most severe option, bankruptcy. But, these options can have negative impacts on your credit score.
Here’s a breakdown of each option and how they differ:
1. Consumer Proposal
What It Is:
A consumer proposal is a legally binding agreement between you and your creditors, arranged through a Licensed Insolvency Trustee (LIT). It involves offering to pay a portion of your total debt, extend the time you have to pay off the debt, or both. Once accepted by the majority of your creditors, the proposal is binding on all.
Key Features:
- Debt Reduction: You may only have to pay a portion of your total debt.
- No Interest: Interest on your unsecured debts stops accumulating once the proposal is filed.
- Asset Protection: Unlike bankruptcy, your assets are not automatically sold to repay creditors.
- Credit Impact: A consumer proposal will stay on your credit report for up to three years after completion, which is less severe than bankruptcy.
Best For:
Those who have a regular income and want to avoid bankruptcy while paying off a portion of their debts.
2. Debt Settlement
What It Is:
Debt settlement involves negotiating directly with your creditors, often through a debt settlement company, to reduce the total amount you owe. The goal is to pay a lump sum that is less than the full amount you owe, in exchange for the creditor forgiving the remaining debt.
Key Features:
- Negotiated Debt Reduction: You may be able to settle your debt for less than the original amount.
- No Legal Process: Unlike consumer proposals or bankruptcy, debt settlement is not a legal process and doesn’t require court approval.
- Credit Impact: Debt settlement can negatively impact your credit score, as creditors may report settled debts as “settled” for less than owed, which is considered negative.
Best For:
Those with a lump sum of money available to pay off a portion of their debt and who want to avoid formal legal processes.
3. Bankruptcy
What It Is:
Bankruptcy is a legal process that provides relief from most debts. It involves surrendering your assets to a Licensed Insolvency Trustee, who will sell them to pay off your creditors. Bankruptcy can discharge most unsecured debts, but it has significant long-term consequences.
Key Features:
- Debt Discharge: Most unsecured debts are discharged at the end of the bankruptcy process, meaning you no longer have to pay them.
- Asset Surrender: You may lose certain assets, which are sold to repay creditors. However, some exemptions exist depending on your province or territory.
- Credit Impact: Bankruptcy severely impacts your credit rating, remaining on your credit report for six to seven years after your discharge (or longer for second-time bankruptcies).
- Legal Protection: Creditors must stop contacting you once you file for bankruptcy.
Best For:
Those who are unable to repay their debts through any other means and need a fresh financial start.
Summary of Differences
- Legal Process: Both consumer proposals and bankruptcy involve a formal legal process and the assistance of a Licensed Insolvency Trustee. Debt settlement, however, is a private negotiation with creditors.
- Credit Impact: Bankruptcy has the most severe impact on your credit score, followed by debt settlement, while a consumer proposal has the least negative impact.
- Asset Protection: Consumer proposals and debt settlements typically allow you to keep your assets, while bankruptcy may require you to surrender some assets.
- Debt Repayment: In a consumer proposal, you repay a portion of your debt over time. In debt settlement, you pay a reduced lump sum. In bankruptcy, most debts are discharged, but you may lose assets.
Choosing the right option depends on your financial situation, goals, and ability to repay your debts. It’s often wise to consult with a financial advisor or Licensed Insolvency Trustee to determine the best course of action for your specific circumstances.
This is where debt management programs have their chance to shine. A debt management program is an alternate form of debt consolidation, where all your bills are compiled into a single monthly payment. Your debt total won’t change, but instead of paying your lenders directly, the credit counselling agency handles your re-payment on your behalf.
What is a Debt Management Program?
Given you qualify, a debt management program pairs you with a credit counsellor who will detail a monthly budget you can afford. Here’s how a debt management program works:
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- After approval, go over your financial health with your credit counsellor.
- You’ll want to know the totals on each of your credit cards.
- You should list out any unsecured debt, lines of credit or payday loans.
- Any income sources.
- The credit counselling service kicks in as an agent contacts your creditors on your behalf.
- The counselling agency will negotiate with creditors and work out a new arrangement where payments are managed through them.
- They will work to reduce or even eliminate interest rates applied to your debt and stop any more penalties from happening.
- They will create a repayment schedule where you simply need to keep paying your minimums and stop further damage to your credit score.
- After creditors accept the terms, you are officially in the program.
- You make your agreed upon payment, on time, through the credit counselling agency.
- After approval, go over your financial health with your credit counsellor.
It’s worth noting that any cards included in the debt management program will be frozen, the accounts are closed upon completion of payments. You will usually have 60 months to make all your payments – most people enroll for 36-60 monthly payments.
Your participation in a debt management program is noted on your credit report. It will remain on your credit history for two years from the date you finish paying off your debt through the program.
Should You Choose a Credit Counselling Service?
The quick answer is, “it depends”. Most credit counselling agencies offer a free consultation to evaluate your options and advise you on the path that makes sense for your finances.
While you may be able to handle debt consolidation on your own, it can be helpful to talk to a pro before trying to manage it yourself. Suppose you take out your consolidation loan and don’t consider all variables. In that case, you could end up increasing your debt. This happens when you can’t remake loan payments while juggling life expenses, which leads to more fees, taking you further into debt.
Talking to a credit counselling agency will give you another perspective on how to deal with your debt. This is especially true if your debt-to-income ratio makes it hard to pay your debt down. If so, a debt settlement or bankruptcy may be your only choice.
Credit counselling services tend to be not-for-profit agencies. They are unbiased and aim to present the best choices based on your life and what you can afford.
Main Benefits of Credit Counselling
There are three reasons to work with a credit counsellor:
Unbiased Debt Assessment
You’ll have the professional advice of a trained specialist. A credit counsellor can look at your income, bills, and debts and determine if you can afford to pay them down.
Budgeting Advice
Regardless of the credit counselling services available, we all need a budget to make sense of what we can afford. A budget is a plan for your money to make sure you avoid debt or become debt-free. This document aims to keep you on course; your credit counsellor will help you create a realistic one because they understand how to create budgets that keep you spending within your means. They will identify opportunities to reduce monthly expenses and avoid little purchases that add up. The counsellor will be able to help you deem what’s essential in your life and what is a luxury.
Negotiating with Creditors
The main reason to work with a credit counselling agency is that they will contact your creditors and negotiate on your behalf. Credit companies tend to be rough with individuals, and credit agencies know how to deal with them.
You may be able to contact your creditors and try and lower your interest rates. The main difference is that the credit counselling agency knows what’s attainable, and some credit card companies do not want you to get the best deal.
Armed with credit counselling services, you can reach financial freedom as quickly as possible. Your repayment plan will be a budget you can afford. In general, creditors are more flexible with credit counselling agencies, getting you a better outcome.
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