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| Yes, many Canadians are able to settle their debt without filing for bankruptcy. There are many possible options, and the right option depends on your income, expenses, assets, and debts, and other factors. One common legal option is a consumer proposal, which allows you to make an offer to repay part of your unsecured debt through a Licensed Insolvency Trustee. Once the consumer proposal payments are completed, the remaining balances of the unsecured debts are forgiven, with a few exceptions. |
Bankruptcy is not the only option
Many people wait too long to ask for help because they assume that bankruptcy is the only option. However, in Canada, bankruptcy is just one of several debt solutions. Depending on your situation, you may be able to settle your debt through an informal settlement, a consumer proposal, or a consolidation loan.
The first step is to understand the difference between an informal settlement and a formal legal settlement.
What is informal debt settlement?
Informal settlement means you (or an agent on your behalf) try to negotiate directly with creditors. Creditors may settle for less than what you owe through a workout. You might offer a lump sum payment to settle the debt, offer to make lower payments over time, ask for a lower balance, or ask to reduce the interest rate. This can work in some limited situations, especially if you have access to funds to offer a lump sum payment and the creditor agrees. These types of arrangements work well when you have very few creditors and the arrangement is well-documented with a signed agreement and a release.
The risk is that creditors do not have to accept the offer. Interest may continue. Collection calls may continue. If the agreement is not well-documented by a signed agreement, the creditor may still decide to sue for the full balance, garnish wages or take other collection steps if they are legally able to do so.
What is a debt management plan?
A debt management plan is an informal repayment program arranged through a credit counselling agency where you pay your debts in full—typically within four or five years—by consolidating payments into one monthly amount and often at reduced (or no) interest. The agency distributes your payments to the creditors on your behalf; but since creditor participation is voluntary and the full principal must be repaid, it differs from formal insolvency options, which can offer a reduction of the amount paid.
What is formal debt settlement?
Formal debt settlement means you try to negotiate with creditors through a legal process and with the assistance of a licensed professional. Since formal debt settlement is a legal process, it tends to offer more legal protection and certainty of result.
What is a consumer proposal?
A consumer proposal is a formal legal process administered by a Licensed Insolvency Trustee (“LIT”). The LIT helps you make an offer to your unsecured creditors. The offer may be to make payments over time and pay back a percentage of what you owe, extend the time to pay, or both. Once the consumer proposal is completed, the remaining balance of the unsecured debts are forgiven, with a few exceptions.
Once filed, a consumer proposal offers legal protection that can stop the collection actions of the unsecured creditors. That can include collection calls, lawsuits, and wage garnishments, all of which are stopped by a legal stay of proceedings. Interest on included unsecured debts stops as well and is forgiven upon completion of the proposal. For official information, see the Office of the Superintendent of Bankruptcy’s page on consumer proposals.
Why do people choose a consumer proposal over bankruptcy?
A consumer proposal may be attractive because it can allow you to avoid bankruptcy while still dealing with debt through a legal process. Many people also like that they can make one monthly payment that is fixed and distributed to all the creditors by the LIT.
A consumer proposal may help when you have a steady income and can afford to make payments but cannot afford to repay the full debt with interest. A consumer proposal may also be worth reviewing if you own a home, vehicle or other assets, and you want to understand whether you can keep them by taking control of your unsecured debts.
What debts can be included?
Consumer proposals commonly include unsecured debts such as credit cards, unsecured lines of credit, payday loans, unsecured personal loans, income tax arrears and some older student loan debt. Some debts may not be released by bankruptcy or consumer proposal, such as new student loan debt, so it is important to speak with an LIT before assuming every debt will be treated the same way. Learn more on the David Sklar & Associates Consumer Proposal page.
When bankruptcy may still need to be considered
Bankruptcy may make sense when income is very limited, there are few assets, and a consumer proposal payment is not affordable. It can also be an option when creditors are unlikely to accept a consumer proposal. A Licensed Insolvency Trustee (“LIT”) can compare both options so you can understand the costs, timelines, credit impact, and asset impact before deciding.
How to know whether formal settlement is realistic
Formal settlement is a realistic option when the monthly payment fits your budget and offers the creditors more than they may receive in a bankruptcy scenario. The LIT will review your income, expenses, family size, assets, and creditor balances, and will explain the advantages and disadvantages of all your options.
The goal is not to create a payment that sounds good on paper but is doomed to failure. The goal is a payment that you can actually maintain.
The main takeaway
You may be able to settle your debts without bankruptcy, but the safest path depends on the kind of debt you have, how much you owe, and whether creditors are already taking action. A Licensed Insolvency Trustee can explain your options and help you compare bankruptcy to your other options before you make a decision. For guidance on what happens after filing, see the Office of the Superintendent of Bankruptcy information on creditors contacting you after filing a bankruptcy or proposal. Consumers should also be aware of warnings about debt and credit repair services from the Financial Consumer Agency of Canada.
Frequently asked questions
Can creditors refuse a consumer proposal?
Yes. While most proposals are accepted, creditors do vote on the proposal and may reject the proposal offer and try to negotiate. A Licensed Insolvency Trustee helps structure the offer based on your situation and taking into consideration what creditors may reasonably be expected to accept.
Does a consumer proposal stop interest?
Yes. Interest stops on unsecured debts discharged by a proposal once it is filed and is forgiven along with the principal unsecured debt when the proposal is completed.
Can I settle tax debt without bankruptcy?
Yes. Many income tax debts can be included in a consumer proposal, but the details should be reviewed with a Licensed Insolvency Trustee.
Speak with a Licensed Insolvency Trustee
Speak with David Sklar & Associates for a confidential review of your debt, assets, income and expenses. A Licensed Insolvency Trustee can explain your options and help you choose a realistic next step to help you solve your debt problem. Book a free consultation today.
