Credit counselling, orderly payment of debt, and consumer proposals are all useful ways to address a debt problem. The key to selecting the right option is knowing which program is right for you. Informal options include informal debt settlement arrangements and consolidation loans. Formal options (legislated by the provincial and federal governments) include orderly payment of debt and consumer proposals. In Alberta, a 23.8% increase in consumer proposal filings occurred between March of 2014 and March of 2015 as the program has experienced an increase in popularity that Trustees anticipate will continue in 2016. However, before you can appreciate how a formal proposal protects your assets and affordably fits into your household budget, it is important to understand how consumer proposal alternatives work and why some individuals may opt for an informal program or orderly payment of debt instead.
Consolidation loans are an excellent way to amalgamate all your unsecured debt payments into one monthly payment. If your credit rating hasn’t been too bruised or beat up yet this is one way to get things under control. You will pay interest on the loan however the rate of interest is usually considerably lower than credit cards.
The most important step to getting a consolidation loan is making sure to cancel the credit cards or lines of credit that you are paying off with the loan – this helps you avoid getting in over your head again down the road.
Informal Proposals An informal proposal to creditors can be accomplished independently or with help. You can approach your bank or a new lender to apply for a consolidation loan or approach each creditor to settle your debts one by one. Collectors may be able to discount your balance but will expect immediate payment in return. Your creditors may or may not negotiate a settlement with you and consolidation loans will include interest charges. Neither option stops legal action against you.
Credit counsellors are not regulated and the key is to select the right agency but determining exactly what service they provide, the cost of that service and the limitations of their service. Credit counsellors can advertise Consumer Proposals on their websites which can be misleading because they cannot provide this service as only a Licensed Insolvency Trustee is licensed to administer Consumer Proposals.
Credit counselling or debt settlement companies can help make an informal settlement and negotiate a settlment and stop interest from building further. This can streamline your repayment process and can include financial coaching depending on the credit counselling company. This process is lengthy as most creditors will not settle on any outstanding debts until 6 months has passed where no payments have been made. Negotiations can then begin 6 months after default and can continue for many months more, sometimes taking as long as one year to finalize. During this time your creditors continue to call - you need to be thick-skinned and patient as you wait out through this process. During this time you must also be careful not to sign an acknowledgment of the debt which can undo your efforts to negotiate.
Creditors can opt out of this process and creditors such as Canada Revenue Agency are unwilling to negotiate or settle their accounts. The process is informal so if you can’t get everyone to agree there is nothing to legally bind them to the deal you have offered, nothing stopping legal action and interest may not stop for all of your debts.
Orderly Payment of Debt (OPD)
Conversely, OPD is a formal process administered by Money Mentors in Alberta. The program works well with lower debt levels and is another debt relief solution that requires debt repayment in full. Money Mentors can stop interest from growing and act as the “middle man” between you and your creditors. This program which can only be a maximum of 3 years long. To get an idea of what your payment could look like, take what you owe and divide it by 36, if the resulting figure is more than you can afford to spend on debt repayment each month a consumer proposal may be a more viable option.
A consumer proposal is the only formal debt relief solution to avoid bankruptcy if OPD will not work for you. Unlike OPD a consumer proposal can reduce the amount that you repay to creditors, resulting in a lower monthly payment. Consumer proposals have many benefits in addition to affordability – all creditors are legally bound to participate in the proposal if the majority of creditors accept your offer. With a Licensed Insolvency Trustee’s help a proposal is designed to provide a fair debt settlement to your creditors where interest stops - it allows you to make one monthly payment that works with your household budget and helps you to avoid bankruptcy.
Most creditors will be interested in working with you and with years of experience Licensed Insolvency Trustees are accustomed to negotiating with challenging creditors including Canada Revenue Agency. A payment plan under a consumer proposal can be termed out to a maximum of 60 monthly payments which gives you 5 interest-free years to repay your debts at a discount. This is why this process has become very popular with Canadians struggling with their debts.
Before you sign any contracts or start transferring funds to collection agencies be sure to have a plan to not just maintain your debt but a plan on how to get out of debt for good. Should you like a second option please contact us for a free initial consultation – our goal is to educate and empower you to move forward. Regardless whatever steps you take be sure that your plan will put you on the path from financial distress to financial success.
Rebecca Frederick, Licensed Insolvency Trustee
Frederick & Company