When you’re deeply in debt, you can wind up looking for answers anywhere. One of the many options you’re likely to come across is debt settlement. Debt settlement companies promise a way of dealing with high debt levels, but they may not necessarily offer everything that they promise.
It’s worth exploring all of your options and finding the one that fits your financial situation. Depending on your income, assets, and the size of your debt, you may find that a consumer proposal or personal bankruptcy is a more reliable way of dealing with that debt.
That said, debt settlement may work under the right circumstances. It pays to know what you’re getting into before you agree to anything. If you’re in debt and you don’t know how you’re going to get out of it, book a free consultation at David Sklar & Associates. A Licensed Insolvency Trustee can help explain all of your options, including the risks of debt settlement and the alternatives.
What Is Debt Settlement?
When you sign up for a debt settlement program, you hire a debt settlement company to negotiate on your behalf with your unsecured creditors. The goal of the negotiation is to reduce the interest rates you pay or even negotiate down the principal balance.
The debt settlement company may tell you to stop making payments to your creditors and cut off all communication. They view this as a tactic to persuade creditors into negotiating with them. Instead of paying your creditors, you will start making payments to the debt settlement company. After they collect their fees, they let this money accumulate and will offer it as a settlement to your creditors in exchange for forgiving the rest of your debt. However, there is no assurance as to when the debt settlement company will reach out to your creditors.
This can be a risky path forward, as there are no guarantees that your creditors will agree to work with the company. Meanwhile, your credit score is going down, your creditors can still take legal action, and your creditors can always reject the debt settlement company’s offer and pursue collection actions on their own.
If you’ve cut off payments to your creditors, you’re not making your minimum payments, and interest continues to accumulate. Your debt continues to grow, leaving you in a very vulnerable financial position.
How Does Debt Settlement Work in Canada?
Debt settlement is straightforward in concept. You’re struggling to keep up with your credit card balance, and the debt settlement company offers a way to pay only a fraction of what you owe.
It can sound like a quick fix, but you should know that creditors have a range of options for collecting debts owed to them, and they may not be interested in renegotiating the terms you agreed to when you borrowed from them.
Although debt settlement is a legal way to handle debt in Canada, the Financial Consumer Agency of Canada cautions against believing high-pressure sales tactics and unrealistic promises and warns consumers that they may wind up in more debt than when they started.
The Risks of Debt Settlement
Before agreeing to work with a debt settlement company, there are several risks to consider. There are times when working with a debt settlement company can leave you in more debt than before, at which point you may have fewer options to take as a next step.
Beware of guarantees: Debt settlement companies cannot guarantee or promise results. Their tactics may not work. If your creditors believe they can collect more through other avenues, they are unlikely to cooperate with the debt settlement company. Always be cautious about companies that over-promise results.
Your creditors continue to charge you: One of the biggest risks of debt settlement is that your creditors continue to charge late penalties and interest rates, even if you start working with a debt settlement company. They report non-payments to the credit bureaus, hurting your credit score significantly, and your original debt continues to grow with added charges and interest rates.
Review your savings: Often, you will have to put money into a special savings account managed by the debt settlement company. The company will use these funds to negotiate with your creditors. If you’ve been struggling to keep up with credit card payments, you need to review your budget to see if you can afford debt settlement payments. Consider that you may have to make them for several years.
How long will debt settlement take: One of the first questions you should ask a debt settlement company is how long it will take. While the debt settlement company waits, you may be getting collection calls, and your creditors will be adding late penalties and interest charges to the money you already owe.
Are Consumer Proposals a Better Way Out of Debt?
At face value, a consumer proposal may seem to share similarities with debt settlement. You make monthly payments for several years, and at the end, you’re supposed to be out of debt.
There are several key differences between a consumer proposal vs debt settlement.
Consumer Proposals Are Legally Binding
First, a consumer proposal is a legally binding agreement between the debtor and their creditors. Your agreement is made directly with the credit card companies or other lenders that you owe before you ever make a single monthly payment. If the majority of your unsecured creditors (with their votes calculated according to how much you owe them) agree to the terms of your consumer proposal, all of them are bound by the same agreement.
When you work with a debt settlement company, they take your payments long before contacting your creditors. They can wind up collecting from you for years before any action is taken to address your actual debts. The debt settlement company’s pitch is that after years of receiving no payment from you, your creditors will agree to anything.
Relief from Collection Calls and Garnishments
Second, a consumer proposal provides instant relief from collection calls and legal action, such as garnishing your wages or bank account. Without the legal protection of a consumer proposal or bankruptcy, your creditor or a collection agency can remove money directly from your bank account or your paycheque through garnishment, although they do require a court judgement to do so. Unless the debt settlement company negotiates with your creditors right away, you can still end up facing collection calls and legal action.
How Licensed Insolvency Trustees Are Regulated
Consumer proposals are a government-recognized program created by law to help individuals get out of debt while still giving creditors an opportunity to recoup some of their losses. They provide protections that debt settlement does not.
If you file for a consumer proposal in Canada, it can only be administered by a Licensed Insolvency Trustee. These professionals are closely regulated by the Bankruptcy and Insolvency Act. Licensed Insolvency Trustees must demonstrate knowledge, experience, and skills to become licensed by the Office of the Superintendent of Bankruptcy, and their fees are also federally regulated.
There are more protections and regulations when you work with a Licensed Insolvency Trustee than a debt settlement company. Debt settlement companies are for-profit businesses, and their fees may vary.
Consumer Proposal vs Debt Settlement: Will It Work?
Finally, there is no guarantee of success if you get the help of a debt settlement company. Your creditors don’t have to agree to anything and can pursue you for the debt you owe even if you’ve been paying the debt settlement company.
With a consumer proposal, as long as you keep up with your monthly payments, you’ll be discharged from your debts after a period no longer than five years from all of the unsecured creditors included in the proposal.
Debt settlement may work for you, but make sure you do your background research to find a reputable company before agreeing to anything. If you have second thoughts about a debt settlement company you’re working with, the Collection and Debt Settlement Services Act provides debtors with a 10-day grace period after signing up for debt settlement services. You can cancel your contract without having to provide a reason within that grace period.
Other Options for Getting Out of Debt
Not all financial situations are the same. You may find yourself in a position where you have the money to keep up with payments on a large sum of debt from your past, but the interest is high, and you’re looking for ways to cut down on your costs. You may benefit from debt consolidation options that could give you a way to reduce your interest rates.
You may find yourself in a position where you can’t afford the monthly payments that would be required in either a consumer proposal or debt settlement. Where that’s the case, bankruptcy may be the better or only option available to you.
Given how many options you have available to you, it helps to learn more about them and how they apply to your financial situation. Book a free consultation with a Licensed Insolvency Trustee to discuss the best options available to you.