The 2008 financial crisis and recession have undoubtedly reshaped our world. Besides changing the economic landscape and forcing powerful countries to reconsider their strategies, many individuals have lost their homes, savings, and jobs. This has left many people with massive debts and Canada is no exception to this.
While having an important amount of debt is a debilitating situation that can cause people to lose their savings, assets, cars or properties, Canada is known for its airtight debt relief policies. Debt relief options allow Canadians to benefit from a reliable, safe and above all legal debt settlement program.
What is debt relief?
Debt relief engulfs different strategies that aim to restructure debt in order to provide the indebted party (either individual or organization), with either a partial or total easing of their debt.
Debt cancellation usually seeks to resolve delinquent debt. This is done by paying the creditor a reduced amount of money compared to the initial debt value. Generally, creditors and governments consider debt cancellation or debt reduction measures when the consequences of the debt suffered by the indebted party are so acute that debt relief is the only viable solution.
Individuals can either solve their debt by following a government-issued process or they can hire a debt settlement law firm to do it for them. Indebted parties can also consult insolvency trustees.
Not only are licensed insolvency trustees capable of managing your assets in the event of bankruptcy, they are also professional debt consultants who can help you with debt management. This includes negotiating debt settlement and consumer proposals.
Debt relief is beneficial to all parties involved. This is because the indebted party can resolve their debt and save money, debt settlement firms earn money from the fee they have charged and financial institutions receive more money than they would have, had the indebted individual stopped paying their loan altogether or alternatively 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 credit rating agency Equifax Canada, the average consumer debt in Canada reached $72,950 at the end of 2019 (an increase of 2.7% compared to 2018).
When it comes to the mortgage market, Equifax Canada declared that the average new loan reached $289,000 in Q4 of 2019, an increase of 7.2% compared to 2018 (source). While these figures highlight a clear increase in the average household debt in Canada, they are insignificant compared to the debt figures generated during the Covid pandemic.
The coronavirus pandemic has radically changed our lives, especially when it comes to finances. According to Statistics Canada, the household debt ratio has risen to 170.7% (source).
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How does debt relief work?
A debt settlement is initiated by contacting an insolvency trustee. The debt relief program will ultimately depend on the assessment of an individual or a company’s financial situation and specific needs.
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Pros and cons of debt relief
While debt relief strategies can be of immense help to you or your company, they are not without risks. This is why it would be wise to consider both the pros and cons of any debt relief plan before making a decision.
Benefits of debt relief
- Lower the amount of your debt: The aim of every debt settlement plan is, of course, to reduce the amount of your debt. Any debt cancellation strategy is only valid if it allows you to reduce your debt to a payable amount. For instance, reducing your debt by 60%, is only possible if the client is capable of paying the remaining 40%, either in one single payment or over a fixed period.
- Avoid bankruptcy (if your situation allows it): With bankruptcy you risk losing some of your assets and property. Debt reduction strategies prevent this.
- Avoid legal battle with creditors: Defaulting on the payment of your loan is most likely to cause creditors and debt collectors to take you to court. In addition to the hassle that comes with legal battles, this may result in bankruptcy. Debt settlement averts this by offering a beneficial solution to both the indebted entity and the creditors, thus avoiding unnecessary court drama.
Inconvenients of debt relief
- You risk ending with more debt: In the case of debt consolidation, the indebted entity takes a new loan to pay off his or her already existing debt. Consequently, if you don’t respect your payment obligations, you may end up with more debt.
- Your creditors may refuse to negotiate: Sometimes your insolvency trustee or debt cancellation law firm may fail to reach a settlement with your creditors.
- Being charged settlement fees prior to debt relief: In many cases, your debt settlement law firm may charge a settlement fee even before a debt reduction solution has been drafted. This is especially true when you have multiple creditors.
- Your credit score may suffer: Depending on the debt management program you select, your credit score may take a hit.
Best debt reduction strategies
1. Debt consolidation
Debt consolidation consolidates all your loans into a single one to facilitate payment. One of the key benefits to a debt consolidation loan is that it’s characterized by a lower interest rate and the capacity to spread the payment over a stretched period. While debt consolidation makes your debt easier to manage, it does not eliminate it.
2. Debt settlement
Debt settlement is a solution where an agreement is reached with your creditors that stipulates paying back a portion of your debt. The completion of any debt settlement requires a fee. That why it’s recommended that you only consider a debt settlement if:
- You already have an available sum of money;
- You refer to a licensed insolvency trustee who will be better equipped to negotiate with your creditors.
3. Credit counseling
Credit counseling is a solution that is often suggested by non-profit credit counselors. This debt solution involves the credit counseling agency analyzing your debt situation and then proposing a debt management plan (DMP).
A debt management plan is a debt relief strategy that allows you to pay back your debts over a period of 3 to 5 years. Instead of paying your debts in their old form, credit counseling grants you the ability to pay your debt over an extended amount of time.
This is done by making monthly payments to your credit counseling agency, while the agency takes care of paying the debt to your creditors. One of the key advantages of this strategy is that it allows a reduction of the interest rate.
- Please note: Credit counseling is not in any way a form of debt reduction or cancellation. You will still have to pay your debts in full.
4. Consumer proposal
This type of debt relief takes the form of a legally binding settlement between you and your creditors. A consumer proposal stipulates that you will pay a portion of your debt in a period of up to 5 years. Once that portion of the debt is paid, the rest of your debts are discharged.
As such, a consumer proposal represents one of the cheapest and most reliable forms of debt relief. It’s also a chance to start anew and rebuild your credit score!
5. Personal bankruptcy
In Canada, personal bankruptcy is a legal process regulated by the federal government. While personal bankruptcy allows a total relief from all accumulated debt, it’s a last resort solution because anyone declaring personal bankruptcy will have the majority of their assets taken away. Personal bankruptcy should only be considered if other debt relief forms are not possible.
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