Credit Card Debt Essentials

Consumer Proposal versus Debt Settlement

At a certain point your debt can get beyond what you can handle. Even with a steady income you may still not be able to pay your obligations plus the interest. When paying the full amount owed is not an option it may be time to consider settling your debt for less than what you owe. You have two options—debt settlement or a consumer proposal.

If you are considering debt settlement or a consumer proposal it is important to make sure these are your only options left before bankruptcy. A trained credit counsellor can explain your debt relief options and recommend the best solution for your financial situation. Call 1-800-656-3920 to speak with a credit counsellor or take a free debt analysis and we will call you to discuss options.

Debt Settlement

In this method you negotiate with creditors to pay back only a percentage of what you owe. When creditors know you are having trouble, but are at least attempting to make payments, they have a choice between negotiation and the chance you may file for bankruptcy. In bankruptcy creditors will not receive any money (or very little) so they would often rather negotiate to get at least some money back.

You can hire a debt settlement company to handle the administration but there are often enrollment fees associated with these services. You can also handle the settlement yourself. There are some qualifications you may need to meet for debt settlement in Canada:

1. Some debt settlement options may require you to be solvent
2. In the case of a monthly payment plan, you would be required to have a steady income in place to pay the debt settlement plan
3. Some debt settlement companies require you have at least $10,000 in unsecured debt

During the negotiation there are two partial repayment options which can be negotiated. The first option allows you to pay one lump-sum payment to settle your debt while the other arranges a monthly repayment plan.

It is important to understand if you select to proceed with a debt settlement payable over a specific period, creditors retain the right to enact any and all remedies available to them while you are in default on your debts. This may include but is not limited to collection calls, notices, and litigation.

Consumer Proposals

A consumer proposal is similar to debt settlement in that it allows you to pay back only a portion of what you owe. The difference, however, is a consumer proposal is a more formal legal negotiation. It can only be administered by a trustee on your behalf.

You must hire a consumer proposal administrator who will work with creditors to settle your debt in a legally binding contract. The proposal is presented to all your creditors and they vote to accept or reject it. Once accepted, payments are generally made on a monthly schedule.

The advantage of a binding agreement is creditors cannot pursue any legal action against you for repayment. The monthly payment is also lower than what you pay on each debt separately. Therefore, you have more money each month. Both settlement options also offer advantages over bankruptcy like allowing you to keep your assets and not having to pay additional money if your income increases.

Effects on Credit

Both consumer proposals and debt settlements have a detrimental effect on your credit report. In both cases, creditors report each of your partial payment settlements as Bad Credit / Write-Off (R9 or R7) accounts to the credit bureaus. These particular notes on your credit report will have a drastically negative impact on your credit score and will stay on your credit report for seven years.

Since consumer proposals and debt settlement plans have such a large negative impact on your credit they can affect your life for years to come. As such it’s critical to speak with an expert like a trained credit counsellor to make sure this is the only option you have left before you make a plan to settle. Our trained credit counsellors can help weigh your options, so call 1-800-656-3920 to receive the advice you need now. You can also complete our Free Debt Analysis online to take the first step in finding the right way to eliminate debt given your own unique financial situation.