Difference between revisions of "You Have Options for Getting Out of Debt"

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{{REVIEWEDPLS | reviewer = [https://www.peopleslawschool.ca/lawyer/robert-rogers Robert Rogers], Hamilton Duncan|date= October 2017}} {{Dial-A-Law TOC|expanded = money}}
Being in debt is stressful, and can seriously affect your daily life. The good news is there are options for getting out of debt — and people who can help.


{{Dial-A-Law TOC|expanded = credit}}
==What you should know==
==What should you do if you have money problems?==
===You have options for getting out of debt===
First, assess your overall financial situation. List your monthly expenses for food, rent, clothing, transportation, medical and dental fees, and all other regular expenses (for example, music lessons, if your child takes them). Include a monthly amount for annual expenses like car repairs and insurance. Also include an amount for emergencies—you may have to replace the family car, the TV, your computer or the house furnace. Total this up, and then subtract it from your income. The amount left over is what you have to pay off your debts.  
Whether you’re deep in the red or behind on a payment or two, being in debt is no fun. And coming up with a plan for reducing your debt can feel overwhelming.


Do you have to pay more on your debts each month than you can afford? If so, you’re getting further into debt and should consider one of the following options. Not all of them will work for you, but one of them may.
But you have options for getting out of debt. They include things you can do yourself, such as making a budget or negotiating with your creditors. We’ll walk you through them shortly.


==Options if you can’t pay off your debts==
===There are people who can help===
You can take any of the following steps. Each step is explained below:
As well, there are professionals who can help you get out of debt. (There are also shady players offering “debt relief services” to be aware of. More on those in a moment.)
#Solve the problem yourself.
#Use a debt-management program.
#Consolidate your debts.
#Apply for a consolidation order under the ''[http://laws-lois.justice.gc.ca/eng/acts/B-3/ Bankruptcy and Insolvency Act]''.
#Make a formal proposal under the ''Bankruptcy and Insolvency Act''.
#Declare personal bankruptcy, as a last resort.
#Take no action at all, in some very limited cases.


===1. Solve the problem yourself===
'''Credit counsellors''' help people manage their finances and reduce their debt. They can help you improve your financial habits and create a plan to repay your debts. Many work for non-profit agencies, where their services are free or low-cost.
Sometimes, you can cut back on non-essential monthly expenses, so you have more money to pay off debts. You can also try to increase your income enough to make all your monthly payments. Maybe you can get a second or part-time job. Or your spouse or family may be able to help with a gift or loan. Meanwhile, stop using credit cards—they charge very high interest rates. If you need to borrow, get a loan from a conventional lending institution like a bank or credit union.  


You can contact your creditors, outline your situation, and ask them to suggest ways to solve your problem. They may agree to a better deal that still lets you pay your debts, for example, by charging a lower interest rate, writing off interest, or giving you more time to pay. Be careful about agreeing to repayment schedules that may be too hard. And don’t borrow more money or put off other creditors—and be charged more interest—just to pay the creditors taking action against you.  
A credit counsellor can help you make a '''budget'''. This helps you understand how much you can afford to put towards your monthly debt payments.


===2. Use a debt-management program===
They can also help you improve your financial skills. They can teach you how to avoid going into debt in the future.
A debt-management program involves a written agreement between you and the lender, with the help of an agency such as the Credit Counselling Society of BC. Typically, your debts are consolidated, or combined, into one affordable monthly payment so you can repay them in a reasonable time. Creditors usually support people who use debt-management programs by reducing or eliminating interest charges.  


===3. Consolidate your debts===
As well, credit counsellors can help you put together a '''debt repayment plan'''. This involves lumping together all your debt payments into one monthly payment. You pay that amount to the credit counselling agency. The credit counsellor then pays your creditors.
You may be able to get a consolidation loan from a bank or consumer finance company, which consolidates all your debts. You make just one payment each month. But the finance company will charge you a fee, and the interest may be higher. Also, you may have to use your personal possessions and household items as security for the loan.  


===4. Apply for a consolidation order under the ''Bankruptcy and Insolvency Act''===
To make the plan, the credit counsellor will call your creditors on your behalf and propose a payment schedule.
If you have money available after your monthly budget costs, you could apply for a consolidation order under the orderly-payment-of-debts provisions of the Bankruptcy and Insolvency Act. This involves consolidating your debts into one payment per month, based on your ability to pay. Certain restrictions apply, and certain debts are excluded. The advantage is that creditors cannot take legal action against you unless you default on your monthly payments. But they may still be able to seize any property you used to secure the debt. A credit counselling agency or bankruptcy trustee can explain this process.


===5. Make a formal proposal under the ''Bankruptcy and Insolvency Act''===
Under the law, anyone who represents you in negotiations with your creditors must be licensed as a '''debt repayment agent'''. This includes credit counsellors.
If you receive a regular income and can make meaningful payments over time, you can get help from a bankruptcy trustee to make a formal proposal to your creditors under the ''Bankruptcy and Insolvency Act''. You can design the proposal to suit your situation and income. You may agree to pay in full, or in some smaller amount that creditors will accept. The repayment schedule can be as long as five years.


The advantage of a formal proposal over a debt-management program or debt consolidation is that there’s an immediate “stay of proceedings” when you make the proposal. This means your creditors cannot start or continue any collection action against you. As long as the proposal is accepted—meaning that more than 50% of the unsecured creditors approve it—and you make your payments on time, the “stay” continues. Also, once you’ve successfully completed your proposal, none of the affected creditors has any remaining claims against you—even if they voted against the proposal. But if your proposal is not accepted, you will be declared bankrupt.  
You can check with Consumer Protection BC to make sure anyone you hire to negotiate with your creditors has a licence to be a debt repayment agent. [https://www.consumerprotectionbc.ca/explore-our-enforcement-actions/ Their website features a licence search].


===6. Declare personal bankruptcy, as a last resort===
===Be on the lookout for bad actors===
Sometimes, bankruptcy is the only solution. For this option, you need a trustee in bankruptcy. When you declare bankruptcy, you have to “assign” or give your assets to the trustee, with some exemptions. The bankruptcy stays on your credit rating and can harm your ability to obtain credit for six years.  
You may come across companies offering “debt relief services.” Be careful. Often, they’re trying to scam you.


===7. Take no action at all, in some very limited cases===
Some “guarantee” they can negotiate a deal with your creditors. But a guarantee isn’t possible. Your creditors might turn down a settlement proposal. And you’ll be left on the hook for the fee for the “debt relief service.”
If you have no income or possessions, your creditors may not be able to collect any money from you to repay your debts. Or if your debts are more than six years old, or if you haven’t made any payments or admitted your debts in writing in the last six years, and creditors haven’t taken any legal action, they may have lost the right to sue you. But you should speak to a lawyer before choosing this option.


==How do you decide what to do?==
Some companies offer a loan to allow you to repay your debts until they can “negotiate a better deal with your creditors.” But these loans can come with fees, set-up costs, and high interest rates.
*'''Start by getting free advice and counselling''': The [http://www.nomoredebts.org/ Credit Counselling Society of BC] is a non-profit debt counselling service. They offer counselling about possible solutions to your financial problems and free debt-management workshops. They can help you set up a personal budget to regain control of your finances. And they can set up a debt-management or debt-settlement program for you. The Society has offices in Vancouver, Delta, New Westminster, Surrey, Abbotsford, Nanaimo, Kelowna, and Victoria. Generally, there’s no cost for their services. Their toll free number is 1.888.527.8999.  


*'''Get professional help''':  A reputable, licensed credit counsellor or bankruptcy trustee can help. To find a credit counsellor, do an online search for “credit and debt counselling”. For a bankruptcy trustee, look for “bankruptcy trustee”. Or check with the [http://www.cairp.ca/ Canadian Association of Insolvency and Restructuring Professionals] at 416.204.3242. Most bankruptcy trustees will give a free first consultation to assess your financial situation and explain your choices and their consequences.
Some companies claim they can “fix” or “repair” your credit score. But the steps they can take you can do yourself, at no cost (for example, fix information on your credit report that is inaccurate or dated).


==More information==
===Licensed insolvency trustees help with formal legal processes===
*Check the brochure “[http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br01861.html Dealing With Debt: A Consumer’s Guide]” published by the Office of the Superintendent of Bankruptcy Canada. Or call the Office at 604.666.5007. This website has other information on the bankruptcy process, consumer debt and consumer proposals.
One more note on people who can help. A '''licensed insolvency trustee''' provides advice to people on getting out of debt. They’re professionals regulated by the government office that oversees bankruptcies.
*See the [http://www.legalaid.bc.ca/publications/pub.php?pub=17 Consumer Law and Credit/Debt Law] manual published by the [http://www.legalaid.bc.ca/ Legal Services Society]. This manual is for paralegals, legal information counsellors, and lawyers with clients who have consumer/debt problems.


An insolvency trustee can help you decide on a strategy to get out of debt. If you decide to make a consumer proposal or declare bankruptcy (explained shortly), you must hire a licensed insolvency trustee.


[updated April 2015]
The federal government’s website includes a way to search for an insolvency trustee in your area. [https://www.ic.gc.ca/app/osb/tds/search.html?lang=eng Find a licensed insolvency trustee].


==Work out the problem==
There are several options for getting out of debt.


----
===Option 1. Budgeting out of debt===
----
To tackle your debts, you need to understand your financial situation. Your first step should be to list your '''assets''' (what you own) and '''debts''' (what you owe).
 
Then you should make a '''budget'''. A budget is a plan for how you will spend money over a period of time (one month, for example). It shows how much you expect to get and spend over that period.
 
First, list your monthly '''income'''. This includes income from your job, pensions, or other sources.
 
Next, list your '''expenses'''. Some common monthly expenses are:
 
* mortgage payment or rent
* phone bill
* utility bill
* groceries
* daycare
 
Compare your totals for income and expenses. If you’re spending more than what’s coming in, try to cut back on any non-essential spending. For each expense, ask yourself: do I want this, or do I need it?
 
We provide more detailed guidance on making a budget. See [https://www.peopleslawschool.ca/budgeting-out-of-debt/ budgeting out of debt].
 
===Option 2. Negotiate with your creditors===
First, a caution. Have more than two years passed since you made a payment on a debt or the creditor demanded payment? If so, the creditor may have lost their legal right to enforce the debt. You should seek legal advice before contacting the creditor. See [https://www.peopleslawschool.ca/options-legal-help options for legal help].
 
If you’re having trouble making payments, consider contacting your creditors. Show them the budget you’ve prepared. Make them an offer based on what you can afford. Your creditors may agree to change the terms of your agreement to help you pay.
 
We offer step-by-step guidance on negotiating with your creditors. See [https://www.peopleslawschool.ca/negotiating-payment-terms/ negotiating payment terms].
 
===Option 3. Consolidate your debts===
Consolidating your debts means combining them into a single payment. There are three main ways to do this:
 
* a consolidation loan
* a line of credit
* a debt repayment plan
 
A '''consolidation loan''' is a single, new loan used to pay off multiple debts. Usually, the interest rate (and monthly payment) is lower than when paying multiple debts.
 
Opening a '''line of credit''' for the amount you owe is another way to consolidate your debts. You use the funds in the line of credit to pay off your debts. Usually, the interest rate on a line of credit is lower than when paying multiple debts.
 
With a '''debt repayment plan''', you set up an account with a credit counselling agency. You deposit a monthly amount into the account. The credit counsellor uses this amount to pay your creditors until your debt is erased.
 
We walk you through each of these options in more detail. See [https://www.peopleslawschool.ca/consolidating-your-debts/ consolidating your debts].
 
===Option 4. Negotiate a debt settlement===
 
With a '''debt settlement''', you pay your creditors a lump sum that is less than the full value of what you currently owe. This can range between 20% and 80% of the debt currently owed. (Settlements at the low end of this range are very rare.)
 
A debt settlement only works if you have a good reason why you can’t pay the full amount you owe. For example, maybe you lost your job, or have a serious health problem.
 
You’ll have to persuade your creditors it’s in their interests to accept your lower offer, rather than a smaller amount or nothing at all (if you go bankrupt).
 
You can get help with negotiating a debt settlement. Non-profit credit counselling agencies offer these services. (So do for-profit companies, some of which don’t have your best interests at heart. So be careful.)
 
We have in-depth information on debt settlements. See [https://www.peopleslawschool.ca/negotiating-debt-settlement/ negotiating a debt settlement].
 
===Option 5. Make a consumer proposal===
 
A '''consumer proposal''' is an offer you make to your creditors to settle your debts. If they accept your proposal, you pay them a portion of what you owe and they forgive the rest.
 
It’s a formal, legally binding process overseen by a licensed insolvency trustee. It can take up to five years. Some of your assets may need to be sold. We explain the process in detail. See [https://www.peopleslawschool.ca/making-consumer-proposal/ making a consumer proposal].
 
===Option 6. Declare bankruptcy===
 
'''Bankruptcy''' is a legal process where you give up most of your assets to get rid of your debts. Going bankrupt is a long process with serious consequences. It’s the most drastic option for getting out of debt.
 
A licensed insolvency trustee must file an application for you with a government office. The trustee guides you through the process. They sell your assets (except for a few that are exempt) to pay off your creditors. When the process is complete, you’re “discharged” from bankruptcy. [https://www.peopleslawschool.ca/declaring-bankruptcy/ We walk you through declaring bankruptcy].
 
==Who can help==
===Helpful agencies===
These agencies may be able to help in your efforts to get out of debt.
:'''Credit Counselling Society of BC'''
:A non-profit society that helps people better manage their money and debt.
:Call 1-888-527-8999
:Email: info@nomoredebts.org
:[https://www.nomoredebts.org/ Visit website]
 
:'''Consumer Protection BC'''
:Regulates "debt repayment agents" in the province.
:Call 1-888-564-9963
:[https://www.consumerprotectionbc.ca/ Visit website]
 
:'''Office of the Superintendent of Bankruptcy'''
:Oversees consumer proposals and bankruptcies.
:Call 1-877-376-9902
:[https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/home Visit website]
 
:'''Canadian Association of Insolvency and Restructuring Professionals'''
:Represents licensed insolvency trustees in Canada.
:Call 1-647-695-3090
:[https://cairp.ca/ Visit website]
 
===Legal advice===
Getting legal advice can help you decide on your next step.
:'''Lawyer Referral Service'''
:Helps you connect with a lawyer for a complimentary 15-minute consult to see if you want to hire them.
:Call 1-800-663-1919
:[https://www.accessprobono.ca/our-programs/lawyer-referral-service Visit website]
 
:'''Access Pro Bono's Free Legal Advice'''
:Volunteer lawyers provide 30 minutes of free legal advice to people with low or modest income.
:Call 1-877-762-6664
:[https://www.accessprobono.ca/get-legal-help Visit website]
 
:'''People’s Law School'''
:See more options for free or low-cost legal help.
:[https://www.peopleslawschool.ca/options-legal-help/ Visit website]
 
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Latest revision as of 01:10, 7 November 2023

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by Robert Rogers, Hamilton Duncan in October 2017.
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Being in debt is stressful, and can seriously affect your daily life. The good news is there are options for getting out of debt — and people who can help.

What you should know

You have options for getting out of debt

Whether you’re deep in the red or behind on a payment or two, being in debt is no fun. And coming up with a plan for reducing your debt can feel overwhelming.

But you have options for getting out of debt. They include things you can do yourself, such as making a budget or negotiating with your creditors. We’ll walk you through them shortly.

There are people who can help

As well, there are professionals who can help you get out of debt. (There are also shady players offering “debt relief services” to be aware of. More on those in a moment.)

Credit counsellors help people manage their finances and reduce their debt. They can help you improve your financial habits and create a plan to repay your debts. Many work for non-profit agencies, where their services are free or low-cost.

A credit counsellor can help you make a budget. This helps you understand how much you can afford to put towards your monthly debt payments.

They can also help you improve your financial skills. They can teach you how to avoid going into debt in the future.

As well, credit counsellors can help you put together a debt repayment plan. This involves lumping together all your debt payments into one monthly payment. You pay that amount to the credit counselling agency. The credit counsellor then pays your creditors.

To make the plan, the credit counsellor will call your creditors on your behalf and propose a payment schedule.

Under the law, anyone who represents you in negotiations with your creditors must be licensed as a debt repayment agent. This includes credit counsellors.

You can check with Consumer Protection BC to make sure anyone you hire to negotiate with your creditors has a licence to be a debt repayment agent. Their website features a licence search.

Be on the lookout for bad actors

You may come across companies offering “debt relief services.” Be careful. Often, they’re trying to scam you.

Some “guarantee” they can negotiate a deal with your creditors. But a guarantee isn’t possible. Your creditors might turn down a settlement proposal. And you’ll be left on the hook for the fee for the “debt relief service.”

Some companies offer a loan to allow you to repay your debts until they can “negotiate a better deal with your creditors.” But these loans can come with fees, set-up costs, and high interest rates.

Some companies claim they can “fix” or “repair” your credit score. But the steps they can take you can do yourself, at no cost (for example, fix information on your credit report that is inaccurate or dated).

Licensed insolvency trustees help with formal legal processes

One more note on people who can help. A licensed insolvency trustee provides advice to people on getting out of debt. They’re professionals regulated by the government office that oversees bankruptcies.

An insolvency trustee can help you decide on a strategy to get out of debt. If you decide to make a consumer proposal or declare bankruptcy (explained shortly), you must hire a licensed insolvency trustee.

The federal government’s website includes a way to search for an insolvency trustee in your area. Find a licensed insolvency trustee.

Work out the problem

There are several options for getting out of debt.

Option 1. Budgeting out of debt

To tackle your debts, you need to understand your financial situation. Your first step should be to list your assets (what you own) and debts (what you owe).

Then you should make a budget. A budget is a plan for how you will spend money over a period of time (one month, for example). It shows how much you expect to get and spend over that period.

First, list your monthly income. This includes income from your job, pensions, or other sources.

Next, list your expenses. Some common monthly expenses are:

  • mortgage payment or rent
  • phone bill
  • utility bill
  • groceries
  • daycare

Compare your totals for income and expenses. If you’re spending more than what’s coming in, try to cut back on any non-essential spending. For each expense, ask yourself: do I want this, or do I need it?

We provide more detailed guidance on making a budget. See budgeting out of debt.

Option 2. Negotiate with your creditors

First, a caution. Have more than two years passed since you made a payment on a debt or the creditor demanded payment? If so, the creditor may have lost their legal right to enforce the debt. You should seek legal advice before contacting the creditor. See options for legal help.

If you’re having trouble making payments, consider contacting your creditors. Show them the budget you’ve prepared. Make them an offer based on what you can afford. Your creditors may agree to change the terms of your agreement to help you pay.

We offer step-by-step guidance on negotiating with your creditors. See negotiating payment terms.

Option 3. Consolidate your debts

Consolidating your debts means combining them into a single payment. There are three main ways to do this:

  • a consolidation loan
  • a line of credit
  • a debt repayment plan

A consolidation loan is a single, new loan used to pay off multiple debts. Usually, the interest rate (and monthly payment) is lower than when paying multiple debts.

Opening a line of credit for the amount you owe is another way to consolidate your debts. You use the funds in the line of credit to pay off your debts. Usually, the interest rate on a line of credit is lower than when paying multiple debts.

With a debt repayment plan, you set up an account with a credit counselling agency. You deposit a monthly amount into the account. The credit counsellor uses this amount to pay your creditors until your debt is erased.

We walk you through each of these options in more detail. See consolidating your debts.

Option 4. Negotiate a debt settlement

With a debt settlement, you pay your creditors a lump sum that is less than the full value of what you currently owe. This can range between 20% and 80% of the debt currently owed. (Settlements at the low end of this range are very rare.)

A debt settlement only works if you have a good reason why you can’t pay the full amount you owe. For example, maybe you lost your job, or have a serious health problem.

You’ll have to persuade your creditors it’s in their interests to accept your lower offer, rather than a smaller amount or nothing at all (if you go bankrupt).

You can get help with negotiating a debt settlement. Non-profit credit counselling agencies offer these services. (So do for-profit companies, some of which don’t have your best interests at heart. So be careful.)

We have in-depth information on debt settlements. See negotiating a debt settlement.

Option 5. Make a consumer proposal

A consumer proposal is an offer you make to your creditors to settle your debts. If they accept your proposal, you pay them a portion of what you owe and they forgive the rest.

It’s a formal, legally binding process overseen by a licensed insolvency trustee. It can take up to five years. Some of your assets may need to be sold. We explain the process in detail. See making a consumer proposal.

Option 6. Declare bankruptcy

Bankruptcy is a legal process where you give up most of your assets to get rid of your debts. Going bankrupt is a long process with serious consequences. It’s the most drastic option for getting out of debt.

A licensed insolvency trustee must file an application for you with a government office. The trustee guides you through the process. They sell your assets (except for a few that are exempt) to pay off your creditors. When the process is complete, you’re “discharged” from bankruptcy. We walk you through declaring bankruptcy.

Who can help

Helpful agencies

These agencies may be able to help in your efforts to get out of debt.

Credit Counselling Society of BC
A non-profit society that helps people better manage their money and debt.
Call 1-888-527-8999
Email: info@nomoredebts.org
Visit website
Consumer Protection BC
Regulates "debt repayment agents" in the province.
Call 1-888-564-9963
Visit website
Office of the Superintendent of Bankruptcy
Oversees consumer proposals and bankruptcies.
Call 1-877-376-9902
Visit website
Canadian Association of Insolvency and Restructuring Professionals
Represents licensed insolvency trustees in Canada.
Call 1-647-695-3090
Visit website

Legal advice

Getting legal advice can help you decide on your next step.

Lawyer Referral Service
Helps you connect with a lawyer for a complimentary 15-minute consult to see if you want to hire them.
Call 1-800-663-1919
Visit website
Access Pro Bono's Free Legal Advice
Volunteer lawyers provide 30 minutes of free legal advice to people with low or modest income.
Call 1-877-762-6664
Visit website
People’s Law School
See more options for free or low-cost legal help.
Visit website
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