Mario Garcia is a lawyer at Ratcliff & Company LLP in North Vancouver, BC. His areas of practice include business law, corporate structuring and reorganizations, and First Nations economic development. Mario became involved with access to justice initiatives first with Pro Bono Students Canada and later on working with the Legal Information Society of Nova Scotia.
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Step-by-step guidance to help you negotiate with creditors.
A template to ask to pay less towards a debt.
A template to ask a creditor to write-off a debt.
A template to make a debt settlement offer to creditors.
A template to say you can't make debt payments.
How to negotiate a debt settlement.
We explain six options for getting out of debt.
“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.
You can get professional help to deal with debt problems.
If you’re considering options for getting out of debt, there are professionals who can help. There are also companies offering debt-relief services that are out to take advantage of your situation. Here are five tips to help you find professional assistance as you deal with debt problems.
Tip 1. Credit counsellors help people improve their finances
Credit counsellors help people manage their finances and reduce their debt. They can help you improve your financial habits and put together a plan to pay off your debts. They are trained in personal finance. Many work for non-profit credit counselling agencies, where their services are free or low cost.
A credit counsellor will review your income, assets, expenses and debts. They can help you make a budget to figure out how much money you can afford to put toward paying off your debts each month.
They also help you improve your financial skills, so you avoid getting into debt in the future. They can help you learn to better:
- manage your money
- make financial decisions
- make a budget and stay within it
Some organizations offering credit counselling services are for-profit businesses. Credit Counselling Canada is an association of non-profit credit counselling agencies in Canada. On their website, you can find a non-profit credit counselling agency near you.
Tip 2. “Debt repayment agents” must be licensed
Credit counsellors also help you take action on some of the ways to reduce debt. For example, they can help set up a debt repayment plan. This is a strategy to lump your monthly debt payments into one big payment. You pay a set monthly amount into an account at the credit counselling agency. The credit counsellor uses this amount to pay your creditors until your debts are paid.
To develop the debt repayment plan, the credit counsellor will contact your creditors on your behalf and propose a payment schedule based on your ability to pay.
Under the law in BC, anyone who represents you in negotiations with your creditors must be licensed as a “debt repayment agent”. This includes credit counsellors. It also includes “debt settlement companies”, explained below. Many of them, sadly, are not looking out for your best interests.
Check the Consumer Protection BC website to confirm that anyone you’re hiring to negotiate with your creditors is properly licensed as a “debt repayment agent”.
Tip 3. The problem with debt settlement companies
Debt settlement companies are for-profit businesses that will negotiate with your creditors to offer them a sum of money to eliminate (or “settle”) your debts. The lump sum amount is less than your total debt.
Most debt settlement companies work like this: When you sign a contract with the company, they have you make monthly payments to them. The payments are put into an account. When there’s enough money in the account, the company will make their first settlement offers to some of your creditors.
But here’s the problem. While you’re making payments to the debt settlement company, your creditors get nothing. Some creditors may run out of patience and get a collection agency involved to recover their money. Make sure in advance that your creditors are willing to cooperate with the debt settlement company.
Learn more about how debt settlements work in our page on negotiating a debt settlement.
Before you sign 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.
Tip 4. How to protect yourself from bad actors
“While struggling with my debt load, I came across a ‘debt counselor’ who claimed he could knock down my debt by 70%. And I wouldn’t have to declare bankruptcy. Or even lose my credit rating! But something smelled fishy. He’s not a lIcensed insolvency trustee, though he says he works with licensed trustees and can refer me if necessary. What’s got me spooked are the up-front fees—not to a licensed trustee, but to him, to build a “settlement account” he can then take to my creditors. No timeline was given for this.”
– Samantha, Hope
There’s more to watch out for when seeking help with debt problems. Some companies that offer debt-relief services are trying to scam you.
Some companies blatantly mislead, saying they “guarantee” they can solve your debt problems by swinging a deal with your creditors so you’ll only have to pay back a fraction of your debt. Such a guarantee isn’t possible. Some creditors refuse to negotiate; others may turn down the settlement proposal. Yet you may still need to pay the debt settlement company their fee. You could end up in even more debt than you were in before.
Some companies may encourage you to take out a high-interest loan to pay off your debts until they can “negotiate a better deal with your creditors”. Be aware that some companies make money from fees, set-up costs and interest. You may still be carrying debt after the process is over.
Some companies claim they can quickly and easily fix or “repair” your credit score. It’s impossible to change or erase information that’s part of your credit history, unless information is inaccurate or dated. Improving your credit score takes time. (Learn how to improve your credit score with good habits.)
Watch out for debt-relief companies that do any of the following:
- use high-pressure sales tactics
- make unrealistic promises
- charge excessive fees
- delay payments to creditors
Tip 5. Licensed insolvency trustees help with formal legal processes
A licensed insolvency trustee provides advice to people and businesses about getting out of debt. Trustees are professionals regulated by the government office that oversees bankruptcies.
A trustee can help you decide on a strategy to get out of debt. Depending on your financial situation, they may suggest selling some of your assets, consolidating your debts, making a proposal to your creditors, or declaring bankruptcy.
Usually, the first meeting with a licensed insolvency trustee is free. If you go to the next step and have them make a consumer proposal or declare bankruptcy, you’ll need to pay them. The fees trustees can charge are regulated by the federal government.
To find a licensed insolvency trustee in your area, search this database. When you meet with a trustee, make sure to bring as much information about your finances as possible. For example, bring any credit card statements, loan documents, or mortgage records.
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 trustee.
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