Debt Settlement

Alternative to credit counselling to decrease your debt

It has been my experience that while most of my clients are in a fairly good financial standing, I have also seen people who are struggling to make mortgage or debt payments. It has disturbed me that they would ask me what I can do to help them, but I didn’t know what to suggest to them.

debt settlement
By: Simon Cunningham

I have heard of a number of different options, and most of them are along traditional lines; bankruptcy, consumer proposal or credit counselling. However, I now have an alternative that I consider for most people to be the best alternative-Debt Settlement.

I will briefly summarize each of the traditional alternatives for managing debt.

Credit Counselling – I have a seen a few people go into credit counselling over the years, and it can provide a degree of relief to those who are struggling with personal debts. Credit counselling works by arranging a debt payment plan with a credit counselor who bundles your debt load together into a manageable monthly payment You still pay off 100% of the original amount owing. Clients still struggle to make payments that are really beyond their means but it is more manageable than they had before, and many of these people feel a moral obligation to “pay back what they owe”. It reports on a credit bureau and will stay on it for 2 or 3 years AFTER you finish credit counselling. So, if you are in credit counselling for 5 years, it will take up to 8 years for the credit counselling to be removed from your credit bureau.

I have heard it said that credit counselling is a scheme instituted by the banks to ensure that people pay 100% of the debts owed to them instead of losing the debts to bankruptcy or receiving a partial payment via consumer proposal. Many people are also mistaken in believing that mortgage lenders will look upon credit counselling more favourably than bankruptcy or consumer proposal. They are basically treated the same, but without the benefit of getting one’s affairs in order more quickly and with less financial pain.

Consumer Proposal – This is a method of negotiating a fraction of the total debt owed to creditors under the terms of Canadian bankruptcy legislation. It is considered better for your credit and can allow a debtor to clear up their affairs quicker and with less distress while avoiding the stigma of bankruptcy. It is also possible for this option to include Canada Revenue Agency (CRA) owed back taxes into the proposal. Consumer proposal comes off the credit bureau 3 years after the completion of the consumer proposal, meaning it is basically in the same time frame as credit counselling but with less debt to pay and likely having clean credit much faster than credit counselling.

Bankruptcy – This is the only way to completely wipe out debt, but is possibly the most damaging. If a debtor declares bankruptcy a second time in the future, it makes it almost impossible for that person to ever be approved for credit again. The first bankruptcy stays on a credit bureau for 6-7 years, and a second bankruptcy stays on the credit bureau for 15 years, and it will make it clear that it is a second bankruptcy. Along with consumer proposal, it is the only way to arrange a settlement or removal of CRA debts.

These are the options that most or all people know about, and are the traditional ways of managing debt that has gotten unmanageable. However, I the alternative that works even better for most people that are concerned about clearing up unmanageable debt and repairing their credit quickly is called debt settlement, also known as informal consumer proposal. This method is similar to consumer proposal in nature in that a debtor only pays off a percentage of what they owe, quite often between 30-40%. However, it is done outside of the bankruptcy legislation, so it actually results in repairing credit significantly faster than traditional methods. On the credit bureau, a settled debt will show the status as current, the account as “closed” and will have an annotation of “debt settled” which is much better than “R7” or an “R9” (written off debt). Further, I have been told that some people do not qualify for consumer proposal, but there are no rules to disqualify anyone from doing debt settlement. The only downside of significance that I can see is that CRA back-taxes cannot be settled with this method.

I have partnered with a firm that specializes in this matter and have helped many people to clear their credit and reduce their debts. I work closely with them to help ensure that these goals are met and may work with them to help raise mortgage funds necessary to settle the unsecured debts.

If you are struggling with a heavy debt burden, I would recommend you give me a call. We will be happy to help you get back on your feet and into a better position than you currently are in. I look forward to hearing from you.