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What is debt relief?

Debt relief encompasses various strategies aimed at restructuring debt in order to offer the indebted party (individual or organization) partial or total debt relief.

Debt cancellation generally aims to settle an outstanding debt. This is done by paying the creditor a sum of money reduced from the original value of the debt. In general, creditors and governments consider debt cancellation or reduction when the consequences of the debt suffered by the debtor are so severe that debt relief is the only solution.

They can either settle their debt by following a government-issued process, or they can consult a collective debt settlement lawyer to do it for them. They can also consult a licensed insolvency trustee.

Licensed insolvency trustees are not only capable of managing your assets in the event of bankruptcy, they are also professional debt consultants who can help you manage your debts. This includes debt settlement negotiations and consumer proposals.

Debt relief is advantageous because the debtor can settle his debts and save money. A collective debt settlement firm earns money through fees, and financial institutions receive more money than if the indebted individual had stopped paying loans or declared bankruptcy.

Debt relief can take various forms, such as :

• Debt settlement
• Debt consolidation
• Consumer proposal
• Credit advice
• Bankruptcy

What's the average household debt in Canada?

According to credit rating agency Equifax Canada, the average consumer debt in Canada reached $72,950 at the end of 2019. This represents a 2.7% increase over 2018.

Equifax Canada reported that the average value of new loans reached $289,000 in the fourth quarter of 2019. This represents an increase of 7.2% on 2018(source). While these figures highlight an increase in average household debt in Canada, they are insignificant compared to the debt generated during the Covid-19 pandemic.

The coronavirus pandemic has completely changed our lives, including our finances. According to Statistics Canada, the household debt rate is 170. 7%(source).

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How to navigate debt relief?

Debt settlement begins with a consultation with a licensed insolvency trustee. The debt relief program varies according to the assessment of the financial situation and the specific needs of the individual or company.

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The pros and cons of debt relief

While debt relief strategies can help you or your business, there are risks. That's why it's a good idea to consider the pros and cons of all debt relief plans before making a decision.

The benefits of debt relief  

• Reducing the amount of your debt: The aim of any debt settlement plan is, of course, to reduce the amount of your debt. Any debt cancellation strategy is only valid if it enables you to reduce your debt to a payable amount. For example, reducing your debt by 60% is only possible if the customer is able to pay the remaining 40%, either in a lump sum or over a fixed period.

• Avoid bankruptcy: In the event of bankruptcy, you risk losing some of your assets and property. Debt reduction strategies prevent this.

• Avoid legal problems with creditors: Defaulting on your loan can lead to creditors and debt collectors taking you to court. This could lead to bankruptcy. Debt settlement can avoid this by offering a solution to both debtor and creditors.

The disadvantages of debt relief

• You risk getting into more debt: In debt consolidation, the indebted individual or company takes out a new loan to pay off the existing debt. However, if you don't meet your payment obligations, you risk incurring more debt.

• Your creditors may refuse to negotiate: Sometimes, your insolvency trustee or debt cancellation law firm may not be able to reach a settlement with your creditors.

• Have settlement fees before being considered for debt relief: In some cases, a debt settlement attorney may charge settlement fees before a debt reduction plan has been drafted.

• Your credit rating will be affected: Depending on the debt management program you select, this could worsen your credit rating.

The best debt relief strategies

1. Debt consolidation

Debt consolidation consolidates all your loans into a single loan to make payments easier. One of the advantages of a debt consolidation loan is a lower interest rate and the ability to extend the payment for a certain period of time. Although debt consolidation makes it easier to manage your debt, it doesn't get rid of it.

2. Debt settlement

Debt settlement is a solution or agreement reached with your creditors that stipulates repayment of a portion of your debt. But completing any debt settlement has its costs. That's why it's advisable to consider a debt settlement if:

• You have a sum of money available
• You refer to a licensed insolvency trustee who can negotiate with your creditors.

3. Credit advice  

Credit counseling is a solution often suggested by non-profit credit counselors. This solution involves the credit counseling agency analyzing your debt situation. It then proposes a debt management plan.

A debt management plan is a debt relief strategy that allows you to pay off your debts over a period of 3 to 5 years. This credit counseling gives you the opportunity to pay off your debts over an extended period of time.

This is done by making monthly payments to your credit counseling agency. After that, the agency takes care of paying the debt to your creditors. One of the advantages of this strategy is that it reduces the interest rate.

• Important: Credit counseling is in no way a form of debt reduction or cancellation. You will still have to pay all your debts.

4. Consumer proposal

This type of debt relief is a settlement between you and your creditors. A consumer proposal stipulates that you will pay a portion of your debt for a period of up to 5 years. Once this part of the debt is paid off, the rest of your debts are settled.

A consumer proposal is one of the cheapest and most reliable forms of debt relief. It's also a chance to start over and rebuild your credit rating!

5. Personal bankruptcy

In Canada, personal bankruptcy is a legal process regulated by the federal government. Although personal bankruptcy provides relief for all accumulated debts, it should be the last option. When you declare bankruptcy, you may lose most of your assets. Personal bankruptcy should be considered if other forms of debt relief are not possible.

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