As of November 2020, the average Canadian consumer debt amounted to $74,905. That's a staggering 3.3% increase from the average back in the third quarter of 2019. This also brought the total Canadian consumer debt to over $2 trillion.
That explains how the average Canadian household debt ratio rose to 170.7% by the third quarter of 2020. That's 7.9% higher than the second quarter.
If you racked up a lot of debt yourself, know that there are programs for debt relief that Canadian residents can rely on. Personal bankruptcy is one of them, but you should use this as a last resort. You have a few other options to get debt help without going bankrupt.
To that end, we created this comprehensive guide on how to get out of debt. Read on to discover what your debt relief options are so that you can start preparing as early as today!
Consumer Proposal
A consumer proposal is a legally binding contract between debtors and their creditors. It's a Canadian government program for debt help granted to qualified debtors. You may qualify for a consumer proposal if your debts amount to $250,000 or less.
Note that only a Licensed Insolvency Trustee (LIT) can administer a consumer proposal. LITs are professionals with authority to give debt-related advice and services. By law, they're the only ones who can administer proposals and bankruptcies in Canada.
The Government of Canada has an official list of 1,027 individual LITs and 214 LIT firms.
How a Consumer Proposal Can Help You Get Out of Debt
With a consumer proposal, the LIT curates a "proposal" or offer of repayment to creditors. It can be a proposal of paying only a fraction (or a percentage) of what you owe to your creditors. In some cases, a consumer proposal can reduce debts by up to 70%.
The LIT can also make a proposal to your creditors that you'll pay back your debts over a longer period. The LIT may even be able to combine both a debt reduction and extended repayment in the offer. In either case, the proposal's terms can only be for up to five years.
With a consumer proposal, you can get out of debt by reducing the amount you owe to your creditors. A term extension can make it easier to pay your debts as it lowers your periodic repayments. However, you'd still have to pay back a portion of what you owe, so it won't eliminate your debts.
With that said, be wary of sites promising free Canadian government grants to pay off debt. What may be free are the consultations offered by LITs.
Other Benefits of Consumer Proposals
Once the LIT files the proposal, you no longer have to make payments to unsecured creditors. Instead, you'll make payments to the LIT. Moreover, the filed proposal stops wage garnishments or lawsuits filed against you.
A proposal also lets you keep your assets, such as a home with an existing residential mortgage. However, you need to make on-time payments to your LIT for this benefit to continue. The proposal becomes void if you miss three monthly payments or have a payment three months past due.
Completing your proposal's terms releases you from the debts stated in the proposal. From here, you can start rebuilding your credit.
Debt Consolidation
You may have heard of debt consolidation as "debt pooling." That's because a debt consolidation program "pools" up some of your existing debts. It's a new loan (or a line of credit) that you use to pay off several high-interest debts or smaller loans.
With debt consolidation, you’d only make one loan repayment to cover several loans. These may include credit card balances, lines of credit, and payday loans. Not all lenders may agree to participate in a debt consolidation program, though.
How Consolidating Debts Can Help You Become Debt-Free
Debt consolidation can help as long as its interest rate is lower than the debts you can consolidate. In this case, you'd pay less every month, as you only have one loan payment to make and one interest charge to worry about. You can then use the extra money to pay off your other existing debts.
Debt consolidation can help you get out of debt as long as you make on-time payments. However, you need to pay more than the minimum payment due if you want to become debt-free faster. That's because the minimum due is usually just for the loan's interest charges.
How to Get a Consolidation Loan
Conventional banks, credit unions, and other financial companies provide debt consolidation programs. Their interest rates and offers vary, but most require an acceptable credit score. You also need to have a stable source of adequate income to repay the new loan.
Be sure to check the interest rate of each consolidation loan or line of credit. Sometimes, their interest rates can be higher than those of the existing debts you want to "pool." Again, consolidation is only a good idea if it lowers the costs of your debt or if it makes it easier to pay down your debts.
Debt Management Plan With a Credit Counsellor
Credit counselling doesn't reduce debts, but it can help you better manage your debts. In this case, a credit counsellor can offer you a program called "Debt Management Plan" (DMP). A DMP summarizes your debts and includes a plan to consolidate your debt payments.
How Does a DMP Work?
With a DMP, a credit counsellor negotiates with your creditors on your behalf. The counsellor asks your creditors if they can lower the interest rates or fees on your debts. Your counsellor can also request an extension on your debts' terms.
Like a debt consolidation loan, a DMP may also cover credit card debts, unsecured loans, or lines of credit.
A DMP is also voluntary, which means that it's still up to creditors to accept the proposal. For this reason, some of your creditors may choose not to agree to your DMP. If they don't, they can still charge you interest and other fees or keep garnishing your wages.
Let's assume your credit counsellor manages to make your creditors agree to the DMP. In this case, you stop making direct payments to your creditors. Instead, you make the payments to your credit counsellor, who then pays your debts on your behalf.
When Is a DMP a Good Idea?
A DMP can be a smart move for debtors who can repay all their debt but don't qualify for a consolidation loan. Like debt consolidation, it marries your debt payments into one monthly payment. The two are also similar in that they can lower or even eliminate interest charges.
However, a DMP has the added benefit of professional input from a financial expert.
Debt Settlement
Debt settlement usually involves a one-time lump sum payment to creditors. The payment amount is typically lower than what you owe your creditors. A debt settlement company negotiates this lower payment amount on your behalf.
Just like with a DMP, your creditors may opt not to agree to your debt settlement offer. If they accept it, you must hand over your lump sum payment to the debt settlement company. The debt settlement agency then pays your creditors with this money.
Be aware that settlement companies cannot guarantee a huge reduction on your debts. Neither can they attest that all your creditors will agree to the settlement offer. The law also bars them from claiming that they can stop collection activity against you.
Personal Bankruptcy
The Bankruptcy & Insolvency Act is the federal law governing personal bankruptcy in Canada. It's a legal debt relief process for honest consumers who can't pay back their debts. It frees up qualified debtors from most types of debts except those excluded by law.
It's for this reason that bankruptcy gives debtors a "fresh start." In September 2020 alone, 2,606 Canadians filed for bankruptcy. However, it's still less common than proposals, as it involves surrendering your assets.
What Happens If You Decide to Declare Bankruptcy?
As mentioned above, only LITs can administer bankruptcy in Canada. Once the LIT files your bankruptcy, you no longer have to deal with your unsecured creditors. The LIT will be the one to communicate with them on your behalf.
Bankruptcy also stops salary garnishments and lawsuits filed against you by creditors. It also stops collection calls from creditors notified about your bankruptcy.
Upon the declaration of your bankruptcy, the LIT begins to sell your assets. These include property you acquire while you're still in bankruptcy. The LIT can't sell assets excluded by federal and provincial law.
Does Declaring Bankruptcy Clear All Your Debts?
No, but it should clear most, if not all, of your outstanding unsecured debts. Your bankruptcy covers any qualifiable debt as of the date you file for this legal procedure.
Bankruptcy should clear your credit card balances, personal loans, and payday loans. It should also eliminate outstanding lines of credit, bill payments, and tax debts. You may also be free of your student loans if you haven't been in school for seven years or more.
Secured loans aren't part of the debts that bankruptcy can clear for you. These include home loans, car loans, and other loans with a secured lien.
How Long Do You Need to Be in Bankruptcy?
If you qualify for an automatic discharge, you will be out of bankruptcy within nine months. This applies to a first bankruptcy and if you don't need to make surplus income payments. You won't have to make these payments if your surplus income doesn't exceed $200 each month.
If you have a higher surplus income, your first bankruptcy will last for 21 months.
If this is your second bankruptcy and your surplus income is less than $200, you'll be in bankruptcy for 24 months. This extends to 36 months if you need to make surplus income payments.
Who Can File for Bankruptcy in Canada?
Any insolvent person in Canada can file for bankruptcy. You don't have to be a Canadian citizen to qualify. You can either be a permanent resident or an owner of a property within the country.
To be an insolvent person means to be unable to pay debts on time. Moreover, the unsecured debts you owe must be at least $1,000. You may also be insolvent if your debts are greater than your assets' value.
A Friendly Reminder: Don't Forget to Pay off Your Other Debts
Keep in mind that most debt relief programs only cover unsecured loans. This means that you may still have to pay other secured loans, such as a mortgage or a car loan. It's vital you keep paying these other debts on time, as defaulting on them may result in repossession.
Moreover, debt relief, including those from the government, won't stop secured loan collection. Non-payment of your other debts will also pull your credit score down and incur more fees. All these can then make it more difficult for you to get out of debt.
Lastly, avoid taking on new large debts while you're still in a debt relief plan. Focus on clearing your old debts first and limit your use of credit to pay for essentials.
Safe Options for Debt Relief in Canada Consumers Can Count On
Of all the programs for debt relief in Canada debtors can qualify for, a consumer proposal is one of the safest. That's because this approach involves a federally-regulated LIT. Bankruptcy is also safe and legal, but it should be your final resort as it involves selling your assets.
Whichever debt relief option you choose, monitor your credit score throughout. For this, you can rely on us here at Insurdinary, as we provide a free credit score check. With this, you can keep track of improvements to your credit score as you pay off your debts.
