Everyday Legal Problems

“I was so far behind on my bills, I felt overwhelmed. I was sure I was going to have to sell my car. Then I met with a credit counsellor. They urged me to do up a budget. Their budget template really helped me see where I was spending my money. I was able to cut back on some things, and now I’m almost fully out of debt.”

– Damian, Surrey

Being in debt is stressful. Whether you’re a few payments behind or so deeply underwater that you don’t open your bills anymore, it can seriously affect your daily life. The good news is there are a number of options for getting out of debt. And there are people who can help.

Option 1. Budgeting out of debt

To get out of debt, you need to fully understand your financial situation. Your first step should be to list your assets (what you own) and debts (what you owe). Then you should make a budget. 

In listing your assets, consider whether there’s something you can sell—maybe a second car or some collectibles? Small sacrifices can sometimes get you through the worst part of a financial crisis.

Your next step should be to make a budget. A budget is a plan for how you will spend money over a period of time, such as a month. It shows all the money you expect to get and to spend during that period. In our page on budgeting out of debt, we walk you through how to make a budget.  

Once you have a budget, you can better see where you’re spending on things that aren’t truly essential. This can help you decide what you can do without, and direct that extra money to reduce your debts.

Credit counsellors such as the Credit Counselling Society and Credit Canada can help you review your finances and make a budget. They also offer useful tools, such as this budget worksheet and this money management workbook to help you get a handle on your spending. 

Option 2. Negotiate with your creditors

If you’re having trouble making payments, it can help to discuss your situation with your creditors. Show them the budget you’ve prepared. Make them an offer based on what you can afford. 

Your creditors may agree to change the terms of your agreement to help you pay. For example, they may:

• extend the time you have to repay
• charge you a lower interest rate
• reduce the amount of your payments

Simply explaining your plan for getting out of debt shows your creditors you aren’t trying to dodge them. You’re dealing with the problem. For more on this option, see our guidance on negotiating payment terms.

A credit counsellor can contact your creditors to let them know the steps you’re taking to pay back your debts. A credit counsellor may also be able to convince your creditors to accept lower payments over a longer term, or charge you a lower interest rate. 

Option 3. Consolidate your debts

Consolidating your debts means combining them into a single payment. This can be done in a number of ways, such as through a consolidation loan, a line of credit, or a debt repayment plan. Consolidating your debts can simplify your finances, lower the interest rate you’re paying, and speed up the process of becoming debt-free.

A consolidation loan

A consolidation loan is a single, new loan used to pay off multiple debts. Usually, the consolidation loan has a lower interest rate than the average rate on your other debts. The monthly payment for the single loan is usually lower than what you were paying on your multiple debts. 

Making a single monthly payment is also simpler than having to keep track of multiple payments. For example, say you have four credit cards with different card issuers. Taking out a consolidation loan means you make a single monthly payment instead of four. This makes it less likely you’ll forget a payment. 

Many financial institutions offer consolidation loans. Usually, you ask for a loan in the amount of all your “unsecured debt”. This is debt in which the creditor does not have a security interest that protects them if you don’t pay. For example, most credit card debt and lines of credit are unsecured debt. 

Your ability to qualify for a consolidation loan will depend on your income and your credit score. The Credit Counselling Society explains what can cause you to get turned down for a consolidation loan.

Many financial institutions and credit counsellors offer loan calculators that can help you see, if you were to consolidate all of your debts into one loan, what your monthly payments would be. See, for example, Royal Bank’s debt consolidation calculator or the Credit Counselling Society’s loan repayment calculator. 

A line of credit  

Opening a line of credit for the total amount you owe is another way to consolidate your debts. A line of credit allows you to borrow funds from an account up to a certain credit limit. You only pay interest on the borrowed funds.  

Lines of credit can have lower interest rates than most loans. A line of credit also offers flexibility when it comes to repayment. As long as you continue to make the minimum payments, you can pay it off as slowly (or as quickly!) as you like.

A debt repayment plan

A debt repayment plan is another way to consolidate your monthly debt payments into one. You set up an account with a credit counselling agency. You deposit a monthly amount into the account. The credit counsellor uses this amount to pay your creditors until your debts are erased.

To develop the debt repayment plan, the credit counsellor contacts your creditors on your behalf and proposes a payment schedule based on your ability to pay. Usually, your monthly payments are then reduced, and extended over a longer period.  

For more on these options, see our guidance on consolidating your debts.

If you’re not sure which approach to consolidating your debts is the best option for you, consider seeing a non-profit credit counselling agency. Their services are free or low cost. They can help you weigh the pros and cons of the various options, and help you figure out if consolidating your debts makes sense in your situation.

Option 4. Negotiate a debt settlement

In some situations, your creditors may be open to negotiating a debt settlement. This option involves paying them a lump sum amount that’s less than the full value of the debt you currently owe. Debt settlements can range between 20% and 80% of the debt owed. (Settlements at the lower end of this range are extremely rare and would require exceptional circumstances.)

A debt settlement only works when you have a convincing reason you can’t pay the full amount you owe. It could be you’ve had a major setback, such as a health problem or you lost your job. You’ll need to persuade your creditors that it’s in their interests to get paid (for example) 75% of what they’re owed rather than a small fraction (if you have to declare bankruptcy).  If you are able to successfully negotiate a settlement, the amount that you owe may vary according to the circumstances.

You can get help with negotiating a debt settlement. Non-profit credit counselling agencies offer debt-settlement services. So do for-profit companies. Some are shady, so you need to be alert in hiring a debt settlement company.

See our page on negotiating a debt settlement for more on this option, including how to protect yourself from companies that don’t have your best interests at heart.

Before you sign a contract with a debt settlement company, do some research. Find out about any unresolved complaints against it. Contact the Better Business Bureau in your area to ask about any complaints.

Option 5. Make a consumer proposal

A consumer proposal is an offer you make to your creditors to settle your debts. If your creditors accept the proposal, you pay them a portion of what you owe, and they forgive the rest. It’s a formal, legally binding process overseen by a licensed insolvency trustee. This is a professional licensed by the federal government to advise people with debt problems. 

For the arrangement to be legally binding, the creditors who hold a majority of your debt must accept the consumer proposal. Once the proposal is accepted, you repay the agreed amount over a maximum of five years. 

Here are some considerations to be aware of before going this route:

• A consumer proposal is more expensive than filing for bankruptcy.
• Some of your assets may need to be sold (but you get to keep more than if you go bankrupt).
• The proposal is a public record and will be included in your credit report.
• A proposal will affect your credit score for less time than going bankrupt will. (Both have a negative impact on your score, but a consumer proposal says on your credit report for less time).
• If you miss three payments under a proposal, the proposal is “annulled” (cancelled).

For more information, see our guidance on making a consumer proposal.

Watch out for companies offering to file a consumer proposal for you. Only a licensed insolvency trustee can file a consumer proposal. Some companies charge hundreds of dollars in fees, and then refer you to a trustee. Never pay anyone for consumer proposal services other than a licensed insolvency trustee. 

Option 6. Declare bankruptcy

Bankruptcy is a legal process where you give up most of your assets to get rid of your debts. For some, declaring bankruptcy can feel like the world has ended. For others, it can be a huge relief, as the prospect of being free of debt removes a load of stress. Going bankrupt is a long process with serious consequences, so it represents the most drastic option for getting out of debt.

The bankruptcy process begins with filing an application for bankruptcy with the government office that oversees bankruptcies. The application is called an assignment. Under the law in Canada, a licensed insolvency trustee must file the assignment in bankruptcy for you. This is a professional licensed by the federal government to advise people with debt problems. 

The trustee guides you through the bankruptcy process. They sell your assets (except for a few that are exempt from the process) to pay off your creditors. Once the process is complete, you’re “discharged” from bankruptcy. This releases you from your debts—except for a few types of debt, such as support payments, which under the law cannot be discharged. 

To learn more about what’s involved in going bankrupt, see our guidance on declaring bankruptcy.

Declaring bankruptcy can help you move on from your debt problems and begin rebuilding your financial future. This video from the federal government explains what to expect when you file for bankruptcy.

As you consider the options for getting out of debt, be aware that there are professionals who can help. In our page on people who can help you get out of debt, we explain the types of professionals who can provide advice and support with debt problems.