Understanding your debt relief options in Canada

Across Canada, many households are feeling the strain of higher everyday costs. Statistics Canada reports that the price of food and housing is rising, leaving many households with less room in their budgets to manage debt payments. 

Throw in unexpected life events like reduced hours, job loss or health issues and suddenly, many Canadians are relying on credit to pay for groceries, rent or car payments.  

Debt relief in Canada 

Debt relief isn’t a one-size-fits-all solution. In Canada, there are a few different ways to manage or reduce debt, and the best choice depends on your specific financial situation. 

There are two federally regulated options, governed by law and administered by Licensed Insolvency Trustees. And also, one non-legally binding option for repayment that helps you manage your debt more effectively.  

Here’s how they work: 

1. Consumer proposal: Reducing your debt without giving up assets 

A consumer proposal is often considered by people who can repay part of what they owe but need relief from the full burden of their debt. 

With a consumer proposal, a Licensed Insolvency Trustee works with you to create a repayment plan based on what you can realistically afford. If creditors agree to the proposal, it becomes legally binding. Payments are spread over a period of five years, and if no payments are missed, no additional interest is added. Mandatory counselling sessions must also be completed.  

This option allows you to keep your assets, such as a home or vehicle, while still getting protection from collections and legal proceedings. The total amount you owe is often reduced, and if your financial situation improves, you can pay off the proposal early without penalty. 

A consumer proposal does affect your credit and remains on your credit report for three years after completion or six years from filing, but it is often the starting point for financial recovery. Consumer proposals work best for people who need predictability and breathing room but still have stable income. 

2. Bankruptcy: A legal reset when repayment isn’t possible 

Bankruptcy is a formal legal process designed for situations when debt has grown beyond what your income or savings can realistically handle.  Bankruptcy provides structure and protection when repayment isn’t manageable. 

In Canada, bankruptcy can only be filed through a Licensed Insolvency Trustee.  

Depending on your situation, you may be required to give up certain assets as part of the process and are expected to meet specific responsibilities, including reporting your income and completing mandatory financial counselling sessions. 

In return, most or all of your unsecured debts, such as credit cards and payday loans, are eliminated. Collection calls stop, wage garnishments end, and most legal actions are paused. Bankruptcy also follows a clear timeline, which helps you understand what the recovery process looks like and what happens at each stage. 

Bankruptcy has a significant impact on your credit history – it remains on your credit report for up to seven years – and does not erase every type of debt. Student loans, child support, and court fines typically remain. Rebuilding takes time and effort, but it does allow you to begin the recovery process. 

3. Credit counselling and debt management plans 

As an alternative to the two legally binding processes discussed above, credit counselling services focus on education and budgeting support. They may also help you set up a debt management plan, often referred to as a DMP. 

With a DMP, a credit counsellor works with creditors to seek reduced interest rates or fees, while you commit to repaying the full amount owed over time. These plans typically last three to five years. 

Because DMPs are not legally binding, creditors are not required to participate, and collection calls can continue for debts outside the plan. This option does not reduce the original amount of debt and does not offer the legal protections of insolvency options, but it may have a less severe impact on your credit if you are able to maintain the plan. 

Credit counselling may be the best choice if your debt is manageable, and your income is sufficient to repay what you owe over time, even at a lower interest rate. 

Why it’s better to consider your debt relief options early 

When debt feels overwhelming, it can be tempting to avoid it. But ignoring or putting off creditors usually increases your stress over time. 

Late payments and defaults can be reported to credit bureaus, which affects your credit score and future borrowing options. Creditors will likely continue collection efforts or have your wages garnished through court action. 

In some cases, speaking directly with your creditors can lead to short-term relief, such as temporary interest reductions or payment extensions. And perhaps you can engage in a DMP as a longer-term solution.  

But if even these payments aren’t sustainable for you over time, only legal options like a consumer proposal or bankruptcy can formally stop collection of actions and help you reset your financial situation. 

Signs that it may be time to seek help include:  

• Regularly missing or delaying debt payments 
• Only being able to pay minimum balances  
• Having to rely on high-interest credit  
• Receiving regular collection notices 
• Borrowing to pay other debts 

Acting earlier often means more options and less disruption to your life. 

A helpful starting point is to weigh what you owe against what you earn in relation to the options available to you. Speaking with a Licensed Insolvency Trustee can help clarify what is possible, and help you decide what to do next, without pressure or obligation. 

Clarity comes from understanding your options, then choosing the path that works best for you.