Exploring Debt Relief Options in Canada 

^{Bromwich+Smith staff | Reading time: 7 minutes | 1455 words | Date: 2024/02/15}

Many Canadians are finding themselves trying to navigate through overwhelming debt. Understanding the multiple debt relief programs that are available in Canada can be difficult, even for those who are aware of the programs available. Let's demystify debt relief programs and explore the pros and cons of each. 

Consumer Proposal 

A Consumer Proposal is a formal debt settlement option regulated by the Bankruptcy and Insolvency Act through the office of the Superintendent of Bankruptcy. This is a legally binding settlement only available through a Licensed Insolvency Trustee (LIT) in Canada. It replaces the multiple debts you may be juggling today with one regular payment for a set period of time. 

Pros: 

* Debt reduction. Through this program your LIT will negotiate directly with your creditors to reduce the debt owed to better reflect what you are able to repay. Often this can mean a total reduction of up to 80% of total debt owed. 
* Protection from creditors. Once a Consumer Proposal has been filed you are protected from all creditor actions, including garnishing your wages or filing a lawsuit. Any action that has begun will be halted. Your creditors must stop contacting you to ask for payment, and if you continue to receive phone calls or letters your LIT will be able to help you to end this. 
* No more interest. Once you file a Consumer Proposal, the interest on your debt is frozen. As long as your Consumer Proposal is in good standing, there will be no further interest accrued. 
* You keep your assets. There are provisions that allow you to retain possession of your assets, including your home and car, while your proposal is in good standing. 

Cons: 

* Credit impact. A Consumer Proposal will show on your credit rating and have a negative impact on your credit score. While this will make it more challenging to obtain credit at best rates and terms, your LIT and Credit Counsellor will help you find ways to rebuild it.  
* Creditor approval. The majority of your creditors must vote in favor of your proposal. Working with a trusted LIT with a high creditor approval rate will help increase the likelihood of your proposal being accepted. Even if your proposal is not accepted, a good LIT will work with you to find an alternative solution. 

Debt consolidation 

This involves combining debts into one single manageable monthly payment, typically through a consolidation loan or a credit card balance transfer. 

Pros: 

* Simple payments. Being able to manage one monthly payment is easier than juggling multiple debts with multiple payment dates. Debt consolidation typically comes with a fixed repayment term providing a streamlined path to becoming debt free. 
* Lower interest. Typically, a debt consolidation loan will help you secure a lower interest rate compared to the interest rates on your current debt. 

Cons: 

* Risk of further debt. If you do not address the underlying cause of your debt, you have a higher potential of accumulating more after you consolidate what you currently owe.   
* Fees. Some consolidation options come with fees. For example, there could be balance transfer fees, missed payment fees, NSF's or others which will add to the overall cost. 
* Qualification. Like any other loan, you will need to qualify for a debt consolidation loan. This will likely include a credit check and if you have been missing payments, there may be concerns. The impact of this credit check may lower your credit score even further. 

Bankruptcy 

 As with a Consumer Proposal a Bankruptcy is a legal process regulated by the Bankruptcy and Insolvency Act through the Office of the Superintendent of Bankruptcy. It is usually shorter than a Consumer Proposal, allowing you to move on more quickly. A Licensed Insolvency Trustee (LIT) is required to fulfill the obligations of this regulated debt relief option.  

Pros: 

* Discharge from debt. Bankruptcy will discharge all your eligible debts and provide a clean slate and financial fresh start.  
* Financial protection. As soon as you file for bankruptcy an automatic stay of proceeding is put into place which halts your creditors from taking legal action. As with a Consumer Proposal they are no longer able to contact you directly requesting repayment of the debt.  

Cons: 

* Credit impact. You will see an impact on your credit score. While you will have the ability to obtain credit during your bankruptcy, you will likely have less favorable terms. You may find that you quality for a lower amount of credit, higher interest rates, or other requirements. Your LIT and Credit Counsellor can work with you to find ways to rebuild your credit.  
*Assets. You may be required to hand over some of your assets to repay some of the debt owed. Exemptions exist to protect specific assets, like retirement savings or work tools, and are regulated by each province. 

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Understanding which debt relief program may be best for you takes careful consideration. If you are considering insolvency, start with a review of your individual circumstance and future financial goals. Every option comes with its own sets of pros and cons and not all options will be available to every Canadian. Seek professional advice from a reputable Licence Insolvency Trustee, who will take the time to understand .your individual situation and recommend the best debt relief plan for you. 

Bromwich+Smith has a number of debt relief strategies to help you regain control of your finances and get your life back on track. Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at  1.855.884.9243, Live Chat  or you can request a call back at contact us page. We want to see you flourish!      

Navigate overwhelming debt in Canada with insights on Consumer Proposal, Debt Consolidation, and Bankruptcy. Bromwich+Smith offers personalized solutions.

FAQs

1: What is a Consumer Proposal, and how does it work in Canada?

A Consumer Proposal in Canada is a formal debt settlement option governed by the Bankruptcy and Insolvency Act. It involves negotiating with creditors through a Licensed Insolvency Trustee (LIT) to reduce debt, offering one regular payment for a set period. Pros include debt reduction (up to 80%), creditor protection, no more interest, and asset retention. Cons include credit impact and the need for creditor approval.

2: What is debt consolidation, and how does it differ from a Consumer Proposal?

Debt consolidation in Canada combines multiple debts into one manageable monthly payment, often through a loan or credit card transfer. Pros include simplified payments and lower interest rates. However, there's a risk of accumulating more debt if the underlying cause isn't addressed. Fees may apply, and qualification involves a credit check, potentially lowering your credit score.

3: What is the process and impact of filing for bankruptcy in Canada?

Bankruptcy in Canada, regulated by the Bankruptcy and Insolvency Act, discharges eligible debts, providing a fresh financial start. Pros include debt discharge and an automatic stay of legal proceedings. Cons involve a credit score impact, potential asset surrender, and less favorable credit terms during bankruptcy. Exemptions protect specific assets, and the process is shorter than a Consumer Proposal.

4: How does a Consumer Proposal affect credit scores, and can it be rebuilt?

A Consumer Proposal in Canada negatively impacts your credit score. While it may make obtaining credit challenging, a Licensed Insolvency Trustee (LIT) and Credit Counsellor can assist in finding ways to rebuild your credit.

5: What steps should I take to determine the best debt relief option for my situation in Canada?

To find the best debt relief option in Canada, start by reviewing your individual circumstances and financial goals. Seek professional advice from a reputable Licensed Insolvency Trustee who will consider your situation and recommend a suitable debt relief plan.

6: How does debt consolidation impact credit scores compared to a Consumer Proposal?

Debt consolidation in Canada, while simplifying payments, may still affect your credit score due to the credit check during qualification. However, the impact is generally less severe than a Consumer Proposal. Working with a Credit Counsellor can aid in credit rebuilding strategies.

7: What assets may be at risk during bankruptcy in Canada?

In Canadian bankruptcy, some assets may be required for repayment, regulated by exemptions in each province. Specific assets like retirement savings or work tools may be protected, but others may need to be surrendered to settle debts.

8: How long does it take to complete a Consumer Proposal in Canada?

The duration of a Consumer Proposal in Canada depends on the negotiated terms, typically ranging from a few months to five years. Working with a trusted Licensed Insolvency Trustee can help determine an appropriate timeframe based on your financial situation.

9: Can I obtain credit during bankruptcy in Canada?

Yes, you can obtain credit during bankruptcy, but the terms may be less favorable. Creditors may offer lower amounts, higher interest rates, or impose additional requirements. Collaborating with a Licensed Insolvency Trustee and Credit Counsellor can guide you in navigating credit options during this period.

Related blogs:

1. Should you file for Bankruptcy?
2. Consumer Proposal vs. Bankruptcy: What's the Difference?
3. The Pros and Cons of Filing  Bankruptcy in Canada 
4. Is Bankruptcy Right For Me
5. Consumer Proposal: An Alternative to Bankruptcy
6. What is a Consumer Proposal