Finding the Best Debt Relief Option
Getting out of debt to regain financial stability.
Challenges with high-interest rate credit card debt can easily overwhelm your budget. As your balances increase, so do your minimum payment requirements. The result is a situation where you’re living paycheque-to-paycheque and are forced to rely on credit cards to cover every emergency. It’s a downward spiral and you will likely need some form of debt relief to recover.
What is debt relief?
Debt relief is a catchall term that refers to any solution that makes it easier for a borrower to get out of debt. When you can’t get out of debt with traditional monthly payments, you use a debt relief option to make it easier to achieve your goal. Some debt relief options are do-it-yourself, while others require professional support. These are known as debt relief services.
|Do-It-Yourself Debt Relief||Debt Relief Services|
|Interest rate negotiation||Credit counselling|
|Debt consolidation||Orderly Payment of Debt (OPD) program|
|Personal Line of Credit (LOC)||Debt settlement|
|Mortgage refinancing||Consumer proposal|
|Borrowing against home equity||Bankruptcy|
Do-it-yourself debt relief
With do-it-yourself debt relief options, the goal is always the same. You want to lower the interest rate applied to your debt so it’s easier to pay off. Credit cards are known for having high APR. This, combined with low minimum payment requirements, makes it difficult to pay down your balances.
By lowering the interest rate, you can focus on repaying the principal (the real balance that you owe). This allows you to pay off the debt faster, even though in many cases you may pay less each month.
With this solution, you simply call each of your creditors to negotiate lower interest rates on your credit cards. If you’ve been a good, long-time customer and your account has remained in good standing, the creditor may be willing to offer you a lower rate.
Results with this method can vary. Some creditors may be willing to negotiate, while others may not. Some may only agree to lower your rate temporarily or may require you to freeze and close the account once it’s paid off.
What’s more, you are unlikely to have success with this option if your account is delinquent or you’ve missed payments in the past.
A debt consolidation loan is a low-interest rate personal loan that you take out and then use the funds to pay off other high-interest rate debts. It’s an unsecured personal loan, so you will need a good credit score to qualify at the lowest interest rate possible.
This is similar to a debt consolidation loan, except it’s an open credit line. Instead of receiving a one-time lump-sum of cash, you qualify for an open credit line with your bank or credit union. You can use some or all of that line to pay off other high-interest rate debts. This option also requires a strong credit score to qualify.
If you are a homeowner and you have equity available in your home. You may choose to refinance your mortgage and take out some of that equity. Equity is the value of your home minus the remaining balance owed on the mortgage. You can generally borrow up to 80% of the equity that you have available.
This option allows you to get a lower interest rate because it’s a secured loan. Your home serves as the collateral. Keep in mind that this will increase the balance owed on your mortgage, which means your monthly payments may increase as well. You will also pay fees to refinance, including getting an appraisal to assess the home’s current value.
With refinancing, you replace your existing mortgage with a new mortgage. However, there are other borrowing options, such as Home Equity Lines of Credit (HELOCs) and home equity loans which take out a “second mortgage” against your home. In other words, you take out an additional lien against your home.
These options have a slightly higher APR than refinancing, although lower than unsecured options. However, that can significantly increase your risk of default and foreclosure. Be very careful when using options like these to borrow against your home, particularly if you are facing financial challenges and living paycheque-to-paycheque.
Debt relief services
Although most people would prefer to solve financial challenges on their own, some situations simply require professional help. Debt relief services provide this type of support. You hire someone to work with or negotiate with your creditors on your behalf.
This can be a nonprofit organization, such as a credit counselling agency, a private company, such as a debt settlement firm, or a Licensed Insolvency Trustee, who helps you arrange a consumer proposal or file for bankruptcy.
Nonprofit credit counselling services exist to help consumers set up affordable repayment plans with their creditors, also known as debt management plans (DMPs). The credit counsellors work with the credit card companies to reduce or eliminate interest charges applied to your balances.
You still owe your original creditors, but you make one monthly payment to the counselling organization. They distribute the payment each month to your creditors as agreed. You complete repayment in 60 payments or less. The plan will be noted in your credit report for two years from the date you complete the program.
OPD is a government program that’s only available in Alberta, Nova Scotia, Saskatchewan, and PEI. This also consolidates your debt into one monthly payment that you set up through an OPD agency. The interest rate is set at 5%.
This program also repays everything you owe in 60 payments or less. It will be noted in your credit report for three years from the date you complete the program.
Debt settlement is a program that you set up through a private company. The company collects funds to negotiate settlements with your creditors on your behalf. This means you only pay back a percentage of each amount you owe. You pay the settlement company a percentage of each debt settled as their fee.
This solution can be extremely tough on your credit. Any missed payments will be noted in your credit history and the accounts will be noted as settled for six years from the date the balances are discharged. Also, the results can vary. Many creditors will not negotiate with a private settlement firm. Instead, they will expect you to go through a Licensed Insolvency Trustee (LIT) to have your balances discharged.
A consumer proposal is like a debt settlement because you only repay a portion of what you owe to each creditor. However, that portion is set by a Licensed Insolvency Trustee, who reviews your finances to determine what you can reasonably afford to repay within five years.
Once the Trustee determines how much you will pay, you and your creditors agree to the plan in a legally binding agreement. This relief option will be noted on your credit report for three years from the date you complete the proposal. Also, be aware that the fees can be high.
When the Licensed Insolvency Trustee reviews your finances, they may rule that you are insolvent and must file for bankruptcy. Being declared insolvent means that you are so overextended with debt that you cannot reasonably afford to repay what you owe.
In this case, the Trustee will take control of your assets and any assets that do not qualify for an exemption where you live will be sold. The proceeds will be used to pay off your creditors, then the remaining balances on your debt will be discharged.
Bankruptcy will be noted on your credit report for six years from the date your balances are discharged. It will also become a permanent public record. Bankruptcy should not be entered into lightly, but in some cases, it is simply the last resort a consumer has to get out of a bad situation with debt.
The do’s and don’ts of seeking debt relief
If you’re stuck in a cycle of minimum payments that never seem to get you anywhere, then it’s time to get serious and consider your options for relief. As you decide what to do, here are some important points to keep in mind, so you can make informed choices that put you in the best possible position to recover
The do’s of credit card debt relief
Take stock of where you stand
As people fall into debt problems, it can be all too easy to bury your head in the sand and start to ignore your debt. But if you want to find a solution, you need to get real and be honest about what you owe.
Take full stock of each debt you owe, including the balance, interest rate, status of the debt, and monthly payment.
Keep making minimum payments, if possible
While you search for a solution, try to keep up with the minimum payment requirements on your bills. This will help you avoid damaging your credit, which can limit your ability to use do-it-yourself debt relief options.
Ask friends and family
Although it’s not easy to talk to people when you’re facing financial challenges, talking to friends and family can help you get a real perspective on these solutions. You can learn if the people you trust had success with any DIY methods of debt relief. You can also ask for referrals if they had a good experience with a debt relief service.
Review a company and program carefully before you sign anything
Whether you’re getting a loan or setting up a debt management plan, make sure to review the company you’re working with carefully. You want to avoid predatory lenders that charge exorbitant fees and rates. Review your loan agreement carefully to make sure you understand
You also want to make sure you’re signing up for the right debt relief service. Some less-than-reputable debt settlement companies may try to pass their services off as a debt consolidation program. Others may charge high fees before performing any service
Make sure any company you’re working with is well-rated by an independent third-party review service. Referrals can also help. Only sign a formal agreement once you’re fully informed.
Stick with your action plan
Once you decide on a solution, be diligent and stick with it. Getting out of debt is not easy, but it’s worth it for the financial freedom that you will gain.
You may need to live on a strict budget while you get out of debt. Even if you use a debt consolidation loan or other do-it-yourself solution, you need to budget carefully to avoid making new charges on your credit cards.
Rein in your spending, save whenever possible to cover emergencies and see your solution through to the end. Otherwise, you may be back to looking for a new solution.
The don’ts of credit card debt relief
Don’t consolidate on your own unless you can balance your budget
Any solution that takes out new financing to pay off existing debt can be risky. Debt consolidation loans, refinancing, and HELOCs will all pay off your existing credit card balances. However, the accounts remain open. If you’re not careful you can run up new balances. Instead of becoming debt-free, you end up with even more debt to pay off.
Consolidating on your own will only work if you can balance your budget to avoid making new credit card charges. This means you will need savings to cover emergencies and unexpected expenses. If you can’t balance your budget and stick to it, consolidating on your own is unlikely to work.
Never use a solution without knowing the cost
Every debt relief option has a cost. Even filing for bankruptcy costs money. You must understand the costs associated with a solution before you use it. Make sure to ask about fees and interest rates. Understand penalties that may apply if issues arise.
If you’re using a debt relief service, be aware that debt settlement and consumer proposals tend to have much higher costs than credit counselling or an OPD program.
Waiting around with the hope that things will get better just gives you more time for things to get worse. Your debts are only going to keep growing and more time gives you more months to miss payments and damage your credit score.
Take action as soon as you realize there is a problem. If you need help, start making calls immediately. Don’t wait.
Never let emotion rule a practical decision
Feelings of fear, shame, or embarrassment are common when you’re dealing with debt problems. You may wonder how you got in this situation and worry about others finding out about your challenges. Asking for financial help can hurt your pride.
Just realize that you’re not alone. You are not the first person to face these types of challenges, and the people who will be helping with are only going to have empathy for your situation.
Don’t let negative feelings keep you from getting the help you need.
Don’t slip back into bad financial habits
Learn from this situation and take steps to ensure you can avoid financial hardship in the future. If bad habits such as overspending or lack of planning led to the challenges you’ve faced, take steps to do better moving forward. Develop a larger emergency fund, start working with a financial advisor, maintain a budget that avoids credit card debt.
Take this as a learning experience and develop a better financial plan moving forward. And avoid falling back into the same financial habits that led to this situation.