I've Got Debt: What Are My Options?

1. Fix it on your own: decrease your expenses and increase your income

You've prepared a monthly budget, now look at what you spend, and try to cut back. Reduce your food budget. Don't eat out as often. Reduce to basic cable or phone service. Take public transportation. Do whatever you can to save money. At the same time, try to increase your income. Work overtime. Find a second job. Take in a boarder or room-mate. If you can increase your income and reduce your expense, you may be able to free up enough cash to allocate more money to repaying your debts.

2. Consolidate all your debts into one debt with a lower interest rate

Get a debt consolidation loan: If you still have good credit, you may be able to borrow enough money, at a low interest rate, to repay all of your high interest debts. You only have one monthly payment, and because you have traded high interest credit card debts for a lower interest bank loan or second mortgage, more of your monthly payment goes to paying off the principal, so you gradually repay your debts.

3. Work out a debt management plan through a credit counsellor

If you don't qualify for a debt consolidation loan, try a debt management plan through a credit counsellor. A not-for-profit credit counsellor will contact your creditors and work out a plan where you repay all of your debts, in full, over a two to five year period. In most cases your creditors will agree to a lower or zero rate of interest, so all of your payments are going to repay your debt. A debt management plan works great if you have credit cards and bank loans, but may not be as effective with tax debts or non-traditional lenders.

4. Negotiate with your creditors about paying a portion of the debt only

If you can't afford to repay your debts in full, your next option is a consumer proposal. In a proposal, a trustee licensed by the federal government prepares a plan where you repay a portion of your debts, based on your ability to pay. In many cases your creditors will agree to take less than the full amount owing. You make one monthly payment over a period of no longer than five years, and your debts are eliminated. Even better, if more than half of your creditors agree (based on dollar value), all creditors must accept the proposal.

5. File bankruptcy and get a fresh start

If you can't afford to make even partial payments, your final option is personal bankruptcy. When you file personal bankruptcy in Canada, a trustee is appointed to administer your affairs for a minimum of nine months.

You are required to make a payment based on your income, and you may lose some of your assets, but at the end of the bankruptcy your unsecured debts are discharged.