While no one means to take on more debt than they can afford, this problem is very common in Canada and across the industrialized world. Credit card debt, in particular, can be debilitating because interest rates tend to be higher for those who can least afford to pay them.
If it’s no longer possible to make monthly payments, borrowers can’t afford to just ignore the problem and allow their debt to keep mounting. They need to take action. The best way to get started is to learn about the various forms of debt help available to Canadians described below.
Debt Consolidation
Debt consolidation allows borrowers to combine multiple, typically high-interest, debts into one monthly payment. Debt consolidation doesn’t just instantly get rid of debt, but it does simplify borrowers’ repayment calendars, minimizes interest charges, and makes it easier for consumers to get out of debt themselves. The most common form of debt consolidation is through unsecured personal loans, which tend to come with lower interest rates than credit cards.
Debt Management Plans
Debt management plans are similar to debt consolidation in that borrowers can minimize their interest and make just one monthly payment. These organizations act as go-betweens, working with debtors to find a monthly payment that is within their means then petitioning creditors to reduce or even eliminate interest charges.
Debt Settlement
When borrowers engage in debt settlement, they do so through private companies. Debt settlement companies help their clients by negotiating with creditors to have their principal balances reduced. The borrower then pays a percentage of the debt they owe, and the creditor discharges the rest.
Unfortunately, debt settlement can come with serious consequences. It always damages borrowers’ credit, and in some cases leads to wage garnishment or lawsuits. Plus, because debt settlement companies are private entities, they sometimes charge high fees even when they are unsuccessful.
Consumer Proposals
Canadians who are convinced they won’t be able to pay back their debt in full can also consult a Licensed Insolvency Trustee (LIT) who will review their finances and determine whether they are insolvent. In most cases, the LIT will determine that the borrower can repay only some of what they owe and help with the arrangement of a consumer proposal.
A consumer proposal reviews the borrower’s finances and lays out a plan for how much debt they can reasonably afford to repay. The LIT then sets up a repayment plan and distributes the debtor’s monthly payments to creditors when they are received. Once the process is complete, there won’t be any possibility of wage garnishments or legal action.
Filing for Bankruptcy
If a LIT determines that someone is insolvent, the recommended action will be to file for bankruptcy. The trustee oversees the sale of non-exempt assets, whose proceeds go to pay creditors, and the remaining balances on all of the borrower’s debts are discharged. Bankruptcy should be considered a worst-case scenario, though, because it damages credit and becomes part of the permanent public record.
Start Exploring Options
Borrowers who have gotten in over their heads have options. It doesn’t matter why their debt loads are so high. Any Canadian who is struggling to repay loans or keep credit card debt under control has a range of options available for finding a solution and moving forward.
