When You Can't Pay Your Debts (No. 253)
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Being in debt is stressful. Falling behind in your payments can seriously affect your daily life. The good news is there are a number of options for getting out of debt.
- 1 Understand your legal options
- 1.1 Option 1. Budgeting out of debt
- 1.2 Option 2. Negotiate with your creditors
- 1.3 Option 3. Consolidate your debts
- 1.4 Option 4. Negotiate a debt settlement
- 1.5 Option 5. Make a consumer proposal
- 1.6 Option 6. Declare bankruptcy
- 2 Get help
Understand your legal options
Option 1. Budgeting out of debt
A little organization goes a long way in solving money problems. A key to getting out of debt is to fully assess your current financial situation. Your first step should be to list your assets (what you own) and debts (what you owe).
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 lists all the money you expect to get (your income) and to spend (your expenses) during that period.
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.
You can also try to increase your income. Maybe you can get a second or part-time job. Or your relatives may be able to help with a gift or loan.
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 budget worksheets to help you get a handle on your spending.
Option 2. Negotiate with your creditors
If you’re having trouble making payments, contacting your creditors to explore options together can help turn things around. Describe your financial situation and explain why you can’t stick to your original agreement. 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
Before you contact a creditor, find out when the limitation period expires. This is a time period set by law for how long someone has to bring a legal action. If it’s been more than two years since you made a payment on a debt or the creditor demanded payment, the creditor may have lost their legal right to enforce the debt.
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.
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. Making a single monthly payment is also simpler than having to keep track of multiple payments.
Your ability to qualify for a consolidation loan will depend on your income and your credit score.
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 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 such as the Credit Counselling Society. 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.
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).
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.
Under the law in BC, anyone who represents you in negotiations with your creditors must be licensed as a “debt repayment agent”. People’s Law School’s page on negotiating a debt settlement includes tips on protecting yourself if you are thinking of hiring a debt repayment agent.
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:
- Making a consumer proposal costs more in fees than declaring bankruptcy.
- Some of your assets may need to be sold (but you get to keep more of your property than if you go bankrupt).
- A consumer proposal will hurt your credit score, but not for as long as declaring bankruptcy will.
Option 6. Declare bankruptcy
Bankruptcy is a legal process where you give up most of your assets to get rid of your debts. Going bankrupt is a long process with serious consequences, so it represents the most drastic option for getting out of debt.
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.
With managing your finances
The Credit Counselling Society of BC is a non-profit society that helps people better manage their money and debt. Contact them to book a free consultation with a credit counsellor.
- Toll-free: 1-888-527-8999
- Web: nomoredebts.org
With debt repayment agents
Consumer Protection BC regulates “debt repayment agents”. Contact them to make a complaint about a debt settlement company.
- Toll-free: 1-888-564-9963
- Web: consumerprotectionbc.ca
With formal legal processes
The Office of the Superintendent of Bankruptcy oversees consumer proposals and bankruptcies, and investigates complaints against licensed insolvency trustees.
- Toll-free: 1-877-376-9902
- Web: ic.gc.ca
The Canadian Association of Insolvency and Restructuring Professionals represents licensed insolvency trustees in Canada.
- Telephone: 647-695-3090
- Web: cairp.ca
You must see a licensed insolvency trustee to make a consumer proposal or declare bankruptcy. To find a licensed insolvency trustee in your area, you can search the government of Canada’s database at ic.gc.ca.
[updated October 2017]
The above was last reviewed for legal accuracy by Robert Rogers, Hamilton Duncan.
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