Can You Erase Your Debts in Canada?

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You’ve tried just about everything to pay down your debts. You started a personal budget to help you track your monthly expenses. You cut costs and pinched pennies so that you could pay off your creditors faster. You tried your best to increase your income, taking on odd jobs and selling household items. You’ve even considered applying for a consolidation loan to reduce all of those obligations to a single high-interest payment.

After all of that effort, you’re still struggling to make any progress with your debt repayment. The debt load is too big for you to tackle with your income alone. The interest rates are too high for you to keep up with.

At this point, you don’t need to find a better debt repayment strategy. You need a debt erasing strategy. You need something that will pause interest, eliminate penalties or reduce your total debt so that you can finally get the debt-free future that you’ve been hoping for. 

So, what are the debt erasing strategies available to Canadians?

Debt Management Plan

A debt management plan (DMP) is an informal offer made by a credit counsellor to your creditors, asking that they consolidate your debts into a reasonable monthly payment. Sometimes, the offer will ask that creditors remove interest and penalties from your debt or extend your payment schedule.

Do your research into a credit counselling agency before you sign up for any of their services. Check to see their connections with national and provincial associations, like Credit Counselling Canada, the Canadian Association of Credit Counselling Services and the Ontario Association of Credit Counselling Services. Check with the Better Business Bureau to see whether there are any unresolved complaints about them. Ask for the counsellor’s credentials and experience and look for any of the following red flags:

  • Promising to eliminate the majority or all of your debts
  • Promising to reduce your debts very quickly
  • Promising that you will get an excellent credit score
  • Promising to help with student loans, income tax, car loans or mortgages
  • Charging a fee for the first consultation

Debt Settlements Are Not the Same

Do not mix up debt management plans with debt settlements. These are very different services.

Debt management plans are offered by for-profit and not-for-profit credit counselling agencies. Debt settlements are strictly performed by for-profit companies that are notorious for preying on the vulnerabilities of desperate debtors.

A debt settlement company will ask you to give them the payments that you would normally send to your creditors. They will hold onto these payments until they accumulate a significant lump sum. After this extended period of non-payment, the company will try to negotiate with your creditors by asking them to accept a lower debt repayment (the lump sum they’ve accumulated) instead of what you owe. This is a very risky strategy. If your creditor refuses to accept this lump sum, you could end up with more debt than ever.

The Issue with Debt Management Plans

The main issue with Debt Management Plans is that they’re not legally binding. A credit counsellor has no authority over your creditors. If a creditor doesn’t want to make an agreement, they don’t have to respond to your counsellor’s calls. If they change their mind, they could choose to break the agreement and go back to their collection actions. Your counsellor cannot guarantee good results.

Consumer Proposal

A consumer proposal has some similarities to a debt management plan. It’s also an agreement made between you and your unsecured creditors. The agreement consolidates your debts into one monthly payment. The purpose of this agreement is to make your debt repayment much more manageable so that you gain more control over your finances.

However, a consumer proposal has some key differences that make it far more effective at erasing debt. First, the proposal asks that your creditors accept a reduced portion of your total debts. You could reduce what you owe by up to 80%. That takes a huge weight off your shoulders. Second, the proposal guarantees that all interest and penalties will stop the moment that it goes into effect. Your debt will not grow as time goes on.

Unlike debt management plans, a consumer proposal deals with all of your unsecured debts, including income tax and student loan debt so you do not have to make separate payment arrangements with these creditors like you would in a debt management plan.

Another key difference is that consumer proposals are performed by Licensed Insolvency Trustees, not credit counsellors.

Licensed Insolvency Trustees:

Licensed insolvency trustees are the only debt professionals that have the authority to perform government-regulated insolvency processes, including consumer proposals, division one proposals and bankruptcies. They are granted a license through the Office of the Superintendent of Bankruptcy (OSB) and must adhere to a strict code of ethics in order to keep that license. Their entire purpose is to help people and businesses who are dealing with debt in Canada.

If you need to talk to a licensed insolvency trustee, you should come to David Sklar & Associates. Our trustees have been helping people struggling with debts in the Greater Toronto Area for years. We have received many awards and accolades for our work, including the Canadian Business Award for Licensed Insolvency Trustee of the Year and the number one spot in Trustpilot’s Canadian Bankruptcy Service Category.

Contact us to book a free consultation, where one of our trustees will assess your finances and talk about the best solutions to relieve your debt problems. Before that consultation, feel free to explore our website for practical tips for debt relief and money management.

Why Licensed Insolvency Trustees Are Important:

Insolvency processes performed by a licensed insolvency trustee are legally binding. This means that creditors must adhere to the terms of the process or risk facing legal consequences. So, if you file a consumer proposal and the majority of your creditors agree to its terms, none of your creditors can back out of the agreement, period. They cannot break the rules and try to collect more funds from you.

A process like a consumer proposal comes with more security than a debt management plan. You don’t have to worry about the debt erasing strategy falling through at a moment’s notice. As long as you comply with the terms, the proposal should go forward without any trouble. 

Personal Bankruptcy

One of the last debt solutions that you can turn to is personal bankruptcy. It’s usually considered as a last resort for erasing debt. Where more appropriate, a Licensed Insolvency Trustee will recommend filing for a consumer proposal or division one proposal beforehand. These options allow you to keep all of your assets.

After filing for bankruptcy, your Licensed Insolvency Trustee will sell your assets (with some exceptions) and distribute the funds amongst your creditors as a way to pay them what they are owed. You will also have to make monthly payments based on your income until you receive a Discharge.

You will usually receive an automatic Discharge after nine months. There are certain circumstances that can push your discharge past that point:

  • When it is not your first time going through bankruptcy.
  • When you have made surplus income.
  • When you have not completed the terms of the process (for example: completing credit counselling sessions)

After receiving a Discharge, your debts to these creditors are considered paid in full. Anything that your monthly payments and asset settlement didn’t cover is officially forgiven. You don’t have to worry about it anymore.  

Pleading Financial Hardship

If you are in debt to the Canada Revenue Agency (CRA), and you’re having trouble making your payments to them, you can try to plead financial hardship — this could lead to the agency cancelling/waiving penalties and interest to make repayment more manageable. They will have to assess your financial situation to see whether you’re eligible for this type of debt relief.

It’s possible that the relief offered after pleading financial hardship isn’t enough. You may still struggle to manage your tax debt. In that case, you should consider filing a consumer proposal. A consumer proposal covers all of your unsecured debts, including the debts that you owe to the CRA.

Repayment Assistance Plan

A Repayment Assistance Plan (RAP) is an option for anyone struggling to repay their student loans because of their income. The plan can provide interest relief and debt reduction. For the first 60 months of the plan, the federal or provincial government will deal with any interest owing that your payment cannot cover. After that, the government will deal with the principal and interest that your payment cannot cover.

This solution is only applicable to people who have outstanding federal or provincial student loans. If you took out personal loans in order to manage your education costs, then you cannot turn to this solution to erase your debt. 

You also have the ability to include your student loans in a consumer proposal or personal bankruptcy. However, these debts can only be forgiven if you’ve been out of school (either by graduating or dropping out) for a minimum of seven years. If it’s been less than seven years, your student loans will not be discharged through the process.  

These debt-erasing options are here for Canadians who really need them. They’re not for people who need to simply tighten up their budgets or rethink their spending habits. They’re for people who are struggling to cope.

If you don’t see an easy way out of your debt, you should look into these solutions and regain some control over your finances.

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

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