Debt can be a heavy burden, affecting your finances and relationship and even taking a toll on your mental health. The statistics show that the average Canadian owes over $23,000 in consumer debt, not including mortgages. If you’re struggling with debt, it’s not the end of it all. There are still options you can use if you find yourself swamped in debt like debt settlement. This blog will discuss the possible options to achieve a debt-free life.
Types of Debt Settlement in Canada
Debt Consolidation
Debt consolidation is taking out a single loan to pay off multiple debts. It is designed to pay off all your debts into one manageable monthly payment at lower interest rates.
Pros:
1. Simplifying your debt payments.
2. Debt consolidation may result in lower interest rates and monthly payments.
3. Can help improve credit score by reducing the amount of debt owed.
Cons:
1. Lenders may require collateral. It can be your home or your car.
2. Debt consolidation gives you manageable monthly payments and a longer time to complete. It can result in paying more interest over time.
3. It can lead to a false sense of financial security, as the underlying debt remains unpaid.
Debt Management Plan
A debt management plan is a repayment plan between you and your creditor. It is a plan where you make one monthly payment to your credit counseling agency. Your monthly payment will be distributed to the creditors according to a pre-agreed-upon plan.
Pros:
1. Provides a structured repayment plan and financial education to help you become debt-free.
2. Reduces or eliminates interest charges and late fees.
3. If payments are made on time, it will help boost your credit score.
Cons:
1. Requires stable income for you to make consistent payments.
2. It will take you several years to complete.
3. some creditors may not agree to the plan.
Consumer Proposal
This is a formal, legitimately official understanding between you and your lenders directed by a licensed insolvency trustee. The borrower offers to take care of a piece of their obligations throughout some period, typically five years, in return for the excess obligation being pardoned.
Pros:
1. Formal and legal binding between you and your creditors to settle the debt.
2. Stops creditors from taking legal action or contacting the debtor for payment.
3. May lower the total amount of debt owed.
Cons:
1. Negative impact on credit score can last for years.
2. May require a lump sum or ongoing payments over a period.
3. Requires a trustee to administer the proposal, which can add to the cost.
Debt Settlement
This is a negotiation between debtors and their creditors to settle their outstanding debts for less than the full amount owed. This can be done either by the debtor or through a debt settlement company.
Pros:
1. Results in a lower total amount of debt you owe.
2. A bankruptcy alternative.
3. Can be negotiated by the debtor or a debt settlement company.
Cons:
1. Negative impact on your credit score can last for several years.
2. May require lump sum payment or ongoing payments over a period.
3. There may be additional fees and charges from the debt settlement company.
Bankruptcy
Bankruptcy should be your last resort for debt settlement. Among others, bankruptcy has the most significant impact on your credit score and long-term consequences on one’s financial future.
Bankruptcy is a legal process that allows individuals unable to pay their debts to have their debts discharged.
Pros:
1. Provides a fresh start because most of your debts will be discharged.
2. Stops creditors from taking legal action or contacting the debtor for payment
3. Maybe the only option for those with overwhelming debt and no ability to repay
Cons:
1. Bankruptcy will stay on your credit report for seven to ten years.
2. Can result in loss of assets.
3. Requires the debtor to meet certain eligibility requirements and pay associated fees.
What is the Best Debt Settlement Tool for you?
Determining which debt settlement tool is best for you will depend on your financial situation and goals. You need to consider various factors if you are planning to do debt settlement. These factors will determine if you need a debt settlement or not.
1. Total Amount of Debt Owed
– Debt settlement is generally the most effective if you are swamped with unsecured debt. If you think your unsecured debts are manageable, you could try other methods like budgeting.
2. Ability to Make Payments
– debt settlement involves a lot of repayment plans and negotiating lump sum payments. Assess your ability to make the agreed-upon payments before considering debt settlement. If you don’t, it can make things worse for you.
3. Potential Impact on Credit Score
– Debt settlement can negatively impact your credit score, as it involves settling debts for less than the full amount owed. However, it may be a better option than bankruptcy, which can have a more significant and longer-lasting impact on your credit.
4. Cost of Debt Settlement
– companies require fees for their rendered service which can add to the total cost of settling your debts. Shop around and compare rates between companies and go for the one that has the best deal.
5. Risks and Benefits
– weigh the risks and benefits of debt settlement before going into one. While debt settlement can help you become debt free, you must know the risks that come with it.
Conclusion:
Debt settlement in Canada is only the other option to be debt-free. It would help if you weighed better options before considering a debt settlement. If it is the only option available to you, make sure you research and understand the risks and benefits to make things better.
