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What is Debt Relief?

Debt relief refers to various strategies designed to restructure debt, providing individuals or organizations with partial or complete alleviation of their financial obligations.

Debt cancellation generally aims to resolve outstanding debt. This is achieved by paying the creditor a reduced sum of money compared to the debt's original value. Typically, creditors and governments consider debt cancellation or reduction measures when the consequences of the debt on the debtor are so severe that debt relief is the only viable solution.

They can either settle their debt by following a government-issued process, or they can consult a debt settlement lawyer to do so on their behalf. They may also seek advice from a licensed insolvency trustee.

Licensed insolvency trustees are not only capable of managing your assets in the event of bankruptcy, but they are also professional debt consultants who can assist you with debt management. This includes negotiating debt settlements and filing a consumer proposal.

Debt relief is advantageous because it allows the debtor to settle their obligations and save money. A debt settlement firm earns revenue through fees, and financial institutions receive more funds than if the indebted individual had ceased loan payments or declared bankruptcy.

Debt relief can take various forms, such as:

• Debt Settlement
• Debt Consolidation
• Consumer Proposal
• Credit Counseling
• Bankruptcy

What is the average household debt in Canada?

According to the rating agency Equifax Canada, the average consumer debt in Canada reached $72,950 by the end of 2019. This represents a 2.7% increase compared to 2018.

Equifax Canada reported that the average value of new loans reached $289,000 in the fourth quarter of 2019, marking a 7.2% increase from 2018 (source). While these figures highlight an increase in average household debt in Canada, they are minor compared to the debt accumulated during the Covid-19 pandemic.

The coronavirus pandemic has profoundly impacted our lives, particularly our finances. According to Statistics Canada, the household debt-to-income ratio stands at 170.7% (source).

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How to Navigate Debt Relief?

A debt settlement process begins with a consultation with a licensed insolvency trustee. The debt relief program will vary based on an assessment of the individual's or business's financial situation and specific needs.

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The Advantages and Disadvantages of Debt Relief

While debt relief strategies can assist you or your business, they do come with risks. Therefore, it is advisable to consider the advantages and disadvantages of all debt relief plans before making a decision.

Advantages of Debt Relief  

• Reduction of Your Debt Amount: The primary goal of any debt settlement plan is, naturally, to reduce the total amount of your debt. A debt cancellation strategy is only effective if it allows you to reduce your debt to a manageable amount. For instance, reducing your debt by 60% is only feasible if the client can pay the remaining 40%, either in a single lump sum or over a specified period.

• Avoiding Bankruptcy: In the event of bankruptcy, you risk losing a portion of your assets and possessions. Debt reduction strategies are designed to prevent this outcome.

• Avoiding Legal Issues with Creditors: Defaulting on your loan payments can lead creditors and collection agents to pursue legal action against you, which could ultimately result in bankruptcy. Debt settlement can prevent this by providing a resolution for both the debtor and the creditors.

Disadvantages of Debt Relief

• Risk of Incurring More Debt: In debt consolidation, the indebted individual or business takes out a new loan to pay off existing debt. However, if you fail to meet your payment obligations, you risk accumulating even more debt.

• Creditors May Refuse to Negotiate: Occasionally, your insolvency trustee or debt cancellation law firm may be unable to reach a settlement with your creditors.

• Fees Required Before Debt Relief Consideration: In some instances, a debt settlement lawyer may charge fees before a debt reduction plan is even developed.

• Your Credit Score Will Be Affected: Depending on the debt management program you select, this could negatively impact your credit score.

Top Debt Relief Strategies

1. Debt Consolidation

Debt consolidation combines all your loans into a single payment, making them easier to manage. A key advantage of a debt consolidation loan is a lower interest rate and the option to extend payments over a longer period. However, while debt consolidation simplifies debt management, it does not eliminate your debt.

2. Debt Settlement

Debt settlement is a solution or agreement reached with your creditors where you repay only a portion of your total debt. However, completing any debt settlement comes with associated fees. For this reason, it is recommended to consider debt settlement if:

• You have a lump sum of money available
• You consult with a Licensed Insolvency Trustee who can negotiate with your creditors on your behalf.

3. Credit Counselling  

Credit counselling is a solution often recommended by non-profit credit counsellors. This process involves a credit counselling agency analyzing your debt situation and then proposing a debt management plan.

A debt management plan is a debt relief strategy that enables you to repay your debts over a period of 3 to 5 years. This form of credit counselling provides the flexibility to pay off your debts over an extended timeframe.

This is achieved by making monthly payments to your credit counselling agency, which then distributes these payments to your creditors. A significant benefit of this strategy is the potential for a reduction in interest rates.

• Important: Credit counselling is not a method for reducing or cancelling debt. You will still be required to pay all your outstanding debts.

4. Consumer Proposal

This form of debt relief is a formal agreement between you and your creditors. A consumer proposal outlines that you will repay a portion of your debt over a period of up to 5 years. Once this agreed-upon portion is paid, the remaining balance of your debts is legally discharged.

A consumer proposal is considered one of the most affordable and dependable forms of debt relief. It also provides an opportunity to make a fresh start and rebuild your credit score!

5. Personal Bankruptcy

In Canada, personal bankruptcy is a legal process regulated by the federal government. While personal bankruptcy provides relief from all accumulated debts, it should be considered a last resort. Declaring bankruptcy may result in the loss of most of your assets. Personal bankruptcy should only be contemplated when other debt relief options are not viable.

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