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If your monthly debt payments, excluding mortgage or rent, exceed 20% of your income, your debts are a serious problem requiring action. Here are some basic alternatives for getting out of debt :
- Credit Counselling
- The Do-It-Yourself Approach
- Debt Management Program
- Debt Consolidation
- Consumer Proposal
- Bankruptcy
Credit Counselling
Many people think of credit counselling along the same lines as debt management or debt consolidation, but it's much more than that. Credit counselling is about education, making informed decisions, planning for your future, and having a plan that is based on your individual situation.
When you call a credit counsellor, they will ask you a series of questions in order to identify the root cause of your financial distress. Before they can recommend a solution to your problem, they must first have a thorough understanding of your problem. Next, the counsellor will conduct a financial analysis by completing a monthly spending plan/budget. This will provide an insight into how much money you are spending each month versus your total monthly income.
With this comprehensive understanding of your financial situation, the counsellor can begin to identify the appropriate solution for your specific situation; of which, there are a few alternatives…
The Do-It-Yourself Approach
After conducting your financial analysis and budget, your counsellor might suggest the do-it-yourself approach, which will include completing self-help educational programs on budgeting, money management, and credit. By going it alone, you may be negotiating with your creditors, paying off debts with the highest interest rates first, obtaining a second job and cutting up your credit cards. While this way is certainly very effective, it is important to note that it requires self-confidence and self-discipline to follow this approach and follow through to completion.
When negotiating with creditors, you will find that some are willing to negotiate lower payments or interest rates, or waive late charges and other fees, because they realize that it’s better to receive some of the money owed than none of it. But you will have to ask yourself if you have the ability and temperament to conduct time consuming negotiations alone.
Debt Management Program (DMP)
The credit counsellor may suggest a DMP, in which the counsellor will work directly with creditors on your behalf as well as provide you with additional education and guidance to make sure you stick with your plan and pay off your debt. You will send a single payment each month to the agency. The agency then pays the appropriate amount to each creditor.
While debt management services may save you money by working with creditors, they typically do not negotiate with creditors to pay less than the total principal amount owed. A negotiation with a creditor to pay back less than the total principal amount owed is often referred to as debt settlement and is rarely an option recommended by a credit counsellor except for very unique situations.
Debt Consolidation
In a typical debt consolidation, you consolidate your existing debts and mortgage payment into one, larger mortgage payment, sometimes at a lower interest rate. You take out a loan, often using your home as collateral, the lender sends you a cheque and you pay off your creditors. But don’t fall behind—you could lose your home !
If you have a habit of buying on credit and carrying large balances on your credit cards, debt consolidation won’t fix your underlying spending problem. Also, you remain solely responsible for paying your own bills and negotiating with creditors.
Consumer Proposal
In a Debt Management Program, debts are paid off at 100 cents on the dollar, but interest is normally reduced or waived entirely. If this is not a feasible solution, the next step is to look at a Consumer Proposal, which is a legal proceeding, set out in the Bankruptcy and Insolvency Act, but which is one step short of a full Bankruptcy. In a Proposal, interest is frozen entirely, and the principal on the debt is paid off at a negotiated rate, which will always be less than 100 cents on the dollar, in some cases much less. The rate will be determined by a Bankruptcy Trustee, who will calculate the maximum amount that a debtor would be able to pay, over a time period up to four years long. During this time period, payments would be made to the Trustee, who would then pay pro-rata shares out to the creditors.
It should be noted that creditors have the right to vote to accept or reject the proposal. If a plurality is achieved for acceptance, the proposal is binding for all creditors, including the minority who voted to reject it. In some cases, though, if a plurality votes to reject, then the debtor can be forced into involuntary bankruptcy.
Bankruptcy
Filing for bankruptcy should only be considered as an absolute last resort. Bankruptcy is a legal proceeding that is available to a person to cope with a financial crisis. One of the main purposes of bankruptcy is to afford the opportunity to a person, who is hopelessly burdened with debt, to free him/herself of the debt and start fresh. However, it comes with a high cost.
Many people who file bankruptcy make the mistake of doing so without fully exploring their options, and never realize they have other, more viable choices that will allow them to preserve a better credit rating. That is why it is critical that if you are suffering from overwhelming debt that you contact a credit counsellor right away.
Bottom line : Know that you have options for getting out of debt, and explore them fully. The key is finding the right solution for you.
Other Options
The alternatives mentioned above are some of the possible solutions to reduce or eliminate debt. The best way to discover the most effective way to get help is by obtaining assistance from someone trained in handling difficult debt problems.
That is why it is critical that if you are suffering from overwhelming debt that you contact a credit counsellor right away. By working one-on-one with a counsellor, you’ll be able to determine the best plan to address your concerns and the most appropriate solution for your situation.
At InCharge Debt Solutions, we are ready to help you discover the solution that is right for you.
