If you have fallen behind on your monthly payments, it can be easy to convince yourself that your finances are ruined and you’ll never be debt free.
But no matter how serious your financial situation is, a debt settlement program can help you clear your outstanding debts and build a better relationship with your finances.
In this guide, we’ll outline what debt settlement is, what the main types of debt settlement are and how you can find the best debt settlement company for you.
Here’s an example of how we can help.
Total amount owed:
Your monthly repayments
Reduced by 88%
Monthly payments are based on individual financial circumstances
What is debt settlement?
Put simply, debt settlement refers to any process that allows you to clear your debts by only paying a fraction of the total amount you owe with your creditor writing off the remaining balance.
It involves coming to an arrangement with your creditors over how you plan to repay your debts – usually through a lump sum or monthly payment plan – with both parties agreeing to hold up their end of the agreement until the proposed terms have been met.
If you have outstanding debts, debt settlement can help you make repayments in a way that is affordable and manageable for you and, more importantly, avoid filing for bankruptcy, which can have a negative impact on your finances for a number of years.
What are the main types of debt settlement in Canada?
In Canada, there are two main types of debt settlement: a debt settlement program and a consumer proposal, and while both debt settlement services are similar, there are several differences you should be aware of:
Debt settlement program
A debt settlement program is type of debt settlement process that involves you repaying less than you owe, usually agreed upon through negotiations with a debt settlement company and your creditors.
Debt settlement programs are usually arranged by a third party, such as a debt settlement company or debt consultant, who will send a lump sum payment or monthly payments to each creditor until the proposed terms have been met and the remaining balance is discharged.
The purpose of a debt settlement program is to help you repay your debts in a way that is achievable for you but, as with most methods of debt settlement, there are some things you must know beforehand.
For example, you must be able to make your monthly payments within a three-year timeframe, there are fees involved and there is no guarantee that your creditors will agree to the proposed terms.
Details of your debt settlement program will also be noted on your credit report for six years, during which time it can negatively impact your ability to get credit.
A consumer proposal is another method of settling your debts for less than you owe and is the only legal form of legally administered debt settlement in Canada.
Because of this, it can only be filed by a Licensed Insolvency Trustee (LIT) who is a financial professional licensed by the Office of the Superintendent of Bankruptcy in Canada.
They will negotiate with your creditors to ensure both parties are happy with the proposed terms and communicate and make changes as necessary.
When filed correctly and the agreed-upon conditions are met, a consumer proposal can help you reduce your debts by up to 80% through monthly payments that you are comfortable with.
What types of debt can be settled through debt settlement?
If you have outstanding debt, you might be wondering what types of debt can be settled through debt settlement.
In most cases, debt settlement can be used to settle the following unsecured debts:
- Credit card debt
- Store card debt
- Payday loans
- Phone bills
- Non-government student loans
- Unsecured lines of credit
How does debt settlement affect my credit rating?
As with most debt solutions, evidence that you have used a debt settlement program will be noted on your credit report and this can affect your credit rating.
The impact of debt settlement on your credit rating will depend on your financial situation with the bigger portion of debt your creditor has to write off, the bigger impact it is likely to have on your credit rating.
This is why it is important to settle your debts with a professional debt settlement company that can negotiate on your behalf and make the best decision for you and your finances.
However, while debt settlement may have a negative impact on your credit score, it is a far cheaper alternative to bankruptcy and will have far less of an impact on your credit history in the long run.
We have a wide range of debt management solutions that could help you write off up to 80% of your debts
How much does debt settlement cost?
Debt settlement can save you a considerable amount of money in the long run through lower interest rates and a lower repayment amount but there are fees involved.
While debt settlement can save you a considerable amount of money in the long run through lower interest rates and a lower repayment amount, there are fees involved.
Debt settlement companies are unregulated, and their fees can vary, depending on the company and the amount of debt they are helping you write off.
This, essentially, means that the savings you make by not paying interest can end up being allocated elsewhere, such as to the debt settlement company.
The kind of fees you can expect to pay depends on which region you reside in and you must research typical prices for your area before you agree to work with a debt settlement company.
Whereas a Consumer Proposal, is filed under federal legislation in Canada that sets out the fees that can be paid to a Licensed Insolvency Trustee.
Those fees will come from the payments you make, so essentially your creditors pay the fees in a Consumer Proposal.
How can I find the best debt settlement company for me?
If you have decided to settle your debts, there are some things you must know before you enter into a debt settlement program.
For example, you must always do your research and read reviews and testimonials before you choose a debt settlement company.
It may also be worth checking that they are licensed with the relevant body and follow industry rules and regulations.
Furthermore, you must steer clear of debt settlement agencies that make promises that seem too good to be true or don’t advertise their pricing strategies up-front as this can lead to unexpected fees down the line.
The debt settlement industry is rife with scammers and, while most provide an honest service, there are many debt settlement companies that would take advantage of someone looking for a quick fix.
It is also worth remembering that there are other debt relief options out there and alternative debt solutions or debt relief services may be better suited to your financial situation, such as a debt consolidation program or debt consolidation loan, debt management plan or credit counselling.