Debt Options for Canadians in Debt

When you’re in debt it’s difficult to know where to find relief and debt counselling.  Do you declare bankruptcy, settle the debt, take out another loan or ignore your creditors all together?

Choosing the right debt management solution can mean the difference between eliminating your debt and making the problem worse.  That is why it is important to explore every available option for debt relief.

There are five basic options for debt consolidation in Canada you can choose from to solve your debt problems, but it is important fully understand each option before you take steps to manage your debt.

Debt Negotiation
The most basic way to get relief from debt is to address your debts one at a time, with a debt negotiation strategy.  In debt negotiation, you personally contact each of your creditors to negotiate the terms of your debt.  Through this strategy, you can negotiate to get interest rates reduced, or get late fees and penalties waived.

If you accounts are current, it’s best to focus on reducing interest rates.  If you are behind on your payments, the better strategy is to ask your creditors to waive any late fees or penalties that have been applied to your account and work with your credit to create a repayment plan.

Debt Consolidation Loans
If you’re looking for a debt management strategy and still have good credit scores, a debt consolidation loan may be your best option. Credit card consolidation can provide debt relief by combining all of your high-interest, unsecured debts into a single monthly payment.

The most important thing to understand about debt consolidation loans is that you will need to qualify for an interest rate that is lower than what you’re currently paying on your debts.

If you can qualify for a debt consolidation loan, you’ll benefit from lower interest rates and lower monthly payments.  Through this debt relief option, you can pay back your debts sooner because interest will accrue at a slower rate.

Debt Management Programs
A debt management program is similar to a consolidation loan in that it will combine multiple debts into a single monthly payment.  The difference is that your do not require good credit scores to qualify.

A debt management program allows a trained credit counsellor to act as a liaison between you and your creditors.  Through this debt relief option, you will stop accruing late fees and your credit rating will stop dropping as a result of late or missed payments.  A debt management program may be your best option if you are behind on credit payments and your credit scores have been negatively affected.

Debt Settlement
Debt settlement occurs when a qualified professional negotiates with your creditors to pay only a percentage of what your own on your accounts – either in one lump sum or on a fixed monthly payment plan.

On the surface, debt settlement doesn’t sound too bad.  In reality it will have a negative affect on your credit scores.  Through this option, the debt settlement company will advise you to stop paying your creditors and instead send your payments to them to hold in an account.  Once this account has grown to a specific amount, the debt settlement company begins calling your creditors to negotiate a settlement with them.  However, because you have stopped making payments on your accounts, late payments continue to be reported to the credit bureaus, credit scores continue to drop and you may continue to receive collection calls.

The final debt management solution to consider is bankruptcy.  It is important to understand that bankruptcy should only be considered as a last resort after you have tried everything else to no success.  Explore every avenue available before filing for bankruptcy.

Simply put, bankruptcy legally declares that you are unable to fulfill your financial obligations, and will drastically affect your financial situation now and into the future.   Declaring bankruptcy stays on your credit reports for seven years, after which your history is cleared.  This means you will ruin your credit and have to start from scratch.

Before filing for bankruptcy or exploring your debt management options, contact a not-for-profit credit counselling agency.  A trained credit counsellor can provide you with a free review of your budget, as well as recommendations on which options may be right for you.

As more Canadians struggle with debt, there is an increased need for financial assistance.  Understanding the difference between the various debt management solutions is essential to building a healthy financial future.