Everything You Need to Know About Debt Settlement

TYPES OF DEBT SETTLEMENT

This doesn't mean it's easy to negotiate a reduction of your debt. There are several methods of debt settlement, each with their own pros and cons which you should consider before you decide on a debt settlement plan. The 3 main types of debt settlement are:

1. Informal proposal, where you personally contact each of your creditors and negotiate a deal with them on your own.
2. Using a Debt Settlement company, which sometimes refer to themselves by other names such as a “debt consultant”, to negotiate with your creditors on your behalf.
3. File a Consumer Proposal, wherein a Licensed Insolvency Trustee submits one formal proposal to all of your unsecured creditors on your behalf. 

HOW DO THESE OPTIONS COMPARE?

Here are the pros and cons of each of the main types of debt settlement:

Informal proposal

Pros	Cons
Best for a very small number of creditors, each motivated to negotiate	Creditors will usually only consider a reduction of your debt if you make the partial payment immediately in a lump sum
Can make different deals with each creditor, including possibly negotiating relief on behalf of a co-debtor or co-signor	Can be tricky to manage negotiations with multiple creditors and keep your total payment manageable
Cost-effective, if you can avoid paying a professional such as a lawyer to help you	Can be very time-consuming Negotiating is uncomfortable and requires some skill Need to make sure you understand exactly what you're agreeing to, and get it in writing to avoid problems down the road
Private process, so others unlikely to find out about it	Might not be able to reach an agreement with all of your creditors if they refuse to negotiate or have unreasonable expectations. Some, like tax collectors, have organizational policies against informally settling debts
It May have a lesser impact on your credit rating than other options (depends on various factors, such as how the creditor reports it, what other debts you have, how much you settled for, etc.)	Will show up as a negative item on your credit report, unless you creditors report it as a full payment based on the original agreement You could unintentionally make things worse for yourself if you don't understand the legal implications (such as impact on statute of limitations) of statements you make to your creditors or making a partial payment

 

Debt Settlement Company

Pros	Cons
Saves time and allows you to avoid uncomfortable conversations Puts the negotiations in the hands of someone who may be more skilled or experienced at negotiating with creditors	Might not get a better deal than you could have negotiated on your own. Creditors aren’t required to negotiate with them. May end up paying more money overall when their fees are considered Spouse or another person who owes the debt jointly, or has co-signed the debt, will be left to pay the unpaid portion
A good debt settlement company will review your situation and the various options before charging you any fees to make sure debt settlement is a good option for you	Complaints have been registered about the practices of some in the debt settlement industry, including high pressure sales tactics, unrealistic or false promises, high or hidden fees and even scams  Due to lack of strict regulation, onus is on you to ensure you're working with a reputable company, read contracts carefully, and confirm they are doing what they say they will do. For more information, see the Government of Canada’s website
Private process, so others unlikely to find out about it	Debt settlement companies will often refer you to a Licensed Insolvency Trustee (LIT) for a Consumer Proposal, after charging you a fee which you could have avoided paying if you had directly approached a LIT in the first place
It May have a lesser impact on your credit rating than other options (depends on various factors, such as how the creditor reports it, what other debts you have, how much you settled for, etc.)	Will show up as a negative item on your credit report, and in some cases working with a debt settlement company can make it worse if creditors report a default due to stopping debt payments while negotiations are ongoing

 

Consumer Proposal

Pros	Cons
Creditors unwilling to negotiate previously or only willing to consider a lump sum settlement will usually consider a Consumer Proposal, even with payment over up to 5 years, often for less than they would consider under other methods. Can even include tax debt and in some cases student loans, which typically cannot be settled otherwise Creditors who don’t like the proposal have to accept the settlement if the majority of other creditors vote in favour of it	Must include all of your unsecured creditors in the proposal and, unless there's a legal reason otherwise, have to offer the same deal to everyone, even family and friends Spouse or another person who owes the debt jointly, or has co-signed the debt, will be left to pay the unpaid portion
Legal “stay of proceedings” is automatically in effect upon filing, so your creditors can’t charge more fees or interest, take you to court, seize assets, or even call you. They can only deal with the Trustee Formal process requires creditors to vote on the Proposal within 45 days, so you won't have to wait a long time to find out it if it's successful. And once approved, it's a legally binding contract	Bad for your credit score, sometimes as negative an impact as a bankruptcy. (May not make your credit score worse than it already is, depending on your situation.) Lenders usually won't extend credit until after proposal is completed
Trustee handles paperwork, communication with creditors, and filing documents. They'll calculate what the creditor would get in a bankruptcy, so creditors can see how much better off they are accepting the proposal Before you file, the Trustee is required to review your situation and options to make sure the Consumer Proposal is your best option. If you decide not to file, typically no fees will be charged Licensed Insolvency Trustees are a safe option for getting advice as they are highly trained, licensed, regulated and overseen by the government, and subject to a legal code of ethics	Legal settlement, available only to insolvent individuals, in accordance with rules set by federal law under the Bankruptcy and Insolvency Act Filed with the government and is a matter of public record. If someone is willing to pay a search fee, they can find out you have filed

 

WHICH OPTION IS RIGHT FOR ME?

As you can see, there are a number of factors to consider before taking on a debt settlement plan. The best and fastest way to find out if debt settlement is right for you, and which option will work best in your situation, is to visit a Licensed Insolvency Trustee who will review your situation and discuss options with you. If you choose to take on an informal proposal to your creditors or work with a debt settlement company, make sure you do your homework first to ensure you will actually be able to fix your debt problems.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

FREQUENTLY ASKED QUESTIONS

Q: I want to make an informal proposal to my creditors but I need some help negotiating with them. Who should I talk to?

In some cases, particularly where the debt is large, you may benefit from consulting a lawyer for assistance. If you need help finding a good lawyer, a Licensed Insolvency Trustee can typically make a referral to a lawyer experienced in debt issues. If you can’t afford a lawyer, you may be able to find free legal resources in your community.

A credit counsellor may be willing to assist you, for a fee. However, make sure you do your homework before you sign anything or pay a credit counsellor. Some credit counsellors are essentially debt settlement companies, with the same potential pitfalls discussed above. And like debt settlement companies, they are not well regulated so you need to do your own research to make sure they are legitimate and have ethical practices.

Another option is to contact a Licensed Insolvency Trustee for a free consultation. Licensed Insolvency Trustees will educate you about your options and may be able to give you some guidance on negotiating with your creditors.

Q: What are my other options for dealing with my debt?

Other options include finding a way to afford your debt payments like budgeting and cutting expenses, negotiating a lower interest rate informally or through a debt management plan, the Orderly Payment of Debts program, or debt consolidation. Alternatively, you may need the comprehensive relief from debt provided by Bankruptcy.

Be careful where you get your information about your options. Inaccurate and biased information is abundant, particularly on the web. A good, reliable resource to check out is the Government of Canada’s website. Licensed Insolvency Trustees are also a reliable resource, as they are specifically educated in this area and are licensed and regulated by the government.

Q: What would my creditors get if I file bankruptcy?

Sometimes it helps to know how much your creditors would get in a bankruptcy, as this can help you figure out what a fair settlement with your creditors looks like. The amount your creditors could expect to receive if you made a bankruptcy filing is very much dependent on your situation. A Licensed Insolvency Trustee will review your assets, debts, income, and family situation, while considering the applicable laws, in order to determine what impact bankruptcy would have on your creditors. Be careful taking advice from anyone else about bankruptcy – only a Licensed Insolvency Trustee can provide bankruptcy filing services, so they have the training and experience to provide information you can rely on. 

For more details on the features and benefits of Bankruptcy, visit this page.