It can be hard to know which professional to turn to when you realize you need help dealing with your debts. Both a credit counsellor and a licensed insolvency trustee can help you – but how do you choose between the two? The answer depends on your debts, finances, future goals, and your unique circumstances.
Different options available
A credit counsellor can help you negotiate a debt management plan with your creditors to repay your debts within three to five years. Generally, the credit counsellor is able to negotiate an interest freeze or a reduced interest rate, allowing more of your payments to go straight to the principal to help you get out of debt sooner. As it is an informal agreement with you creditors, you can choose which debts you would like to include in your debt management plan.
A licensed insolvency trustee administers consumer proposals and bankruptcies. They are the only debt professional licensed by the federal government. They must follow the law to ensure that both you and your creditors are treated fairly. Moreover, only a trustee can administer a consumer proposal or bankruptcy. A consumer proposal is a legal arrangement you make with your creditors to repay a portion of your debts, while a bankruptcy is a legal proceeding under the Bankruptcy and Insolvency Act (BIA) that allows you to eliminate your debts. As a legal process under the BIA, both a bankruptcy and a consumer proposal must include all unsecured debts.
Interest relief vs debt relief
While a debt management plan can offer interest relief, it cannot offer debt relief. All debts included in the debt management plan must be paid in full.
In contrast, both a consumer proposal and bankruptcy offer interest relief and debt relief. Interest stops accruing as soon as you file. In addition, you only have to repay a portion of what you owe depending on the assets you own, your income, and which insolvency filing you choose. The interest relief combine with the debt relief allows those who have filed insolvency a chance to rebuild their finances.
Although a debt management plan will save you some money, you are still required to repay your debts in full. If you have significant debt, your monthly payment could still be unyielding despite the interest relief. Also, most credit counselling agencies are paid from the amount that you agree to pay your creditors in the debt management plan. However, be sure to find out how the fees are paid before agreeing to any debt management plan.
The cost of your bankruptcy or consumer proposal, depends on how much you owe, what assets you own, your income, and if you have to pay surplus income (if you were to file bankruptcy). As proposals and bankruptcies are legal proceedings under the BIA, the fees are highly regulated. Trustees receive a portion of what you pay into your proposal or bankruptcy. They cannot charge fees upfront, and the fee structure will be clearly outlined in your insolvency filing.
Use our Debt Payoff Calculator to compare the cost between credit counselling and a consumer proposal.
A debt management plan does not provide legal protection from your creditors. Nor can it compel your creditors to partake in the plan, as participation is voluntary. That means some creditors like payday loans can choose not to participate while other creditors like Canada Revenue Agency will not participate.
If you owe a significant amount of money to a variety of creditors, a consumer proposal or a bankruptcy can offer you legal protection from the actions of your creditors through an automatic stay of proceedings. That means your creditors cannot sue or garnishee your wages, and collection calls must stop. Moreover, all of your unsecured debts must be included, so creditors like Canada Revenue Agency and payday loan companies can be included.
Impact on credit score
Both a consumer proposal and a debt management plan will appear on your credit report as an R7, meaning that they were a part of a scheduled repayment plan. An R7 from a debt management plan will appear on your credit report and remain there for two to three years after completing the program while an R7 from a consumer proposal will stay on your report for three years after you have completed your proposal.
Bankruptcy receives the most negative score: R9. It will stay on your credit report for six to seven years after you are discharged. While these negative scores will take time to repair, keep in mind missed payments such as an R6 will also stay on your credit report for six years. Do not delay dealing with your debts out of fear of what the solutions may do to your credit score. The fastest way to repair your credit score if you are struggling with debt, is to eliminate your debts.
Consumer proposal or debt management plan?
If you have a manageable amount of debt that you can repay with five years and only a few creditors, a debt management plan can help you become debt free. Similarly, a debt management plan is an option if most of your debt is consumer debt and not student debt or tax debt.
However, if you have a lot of debt from multiple creditors, tax debt, student debt, or you will not be able to repay your debts within five years, considering meeting with a licensed insolvency trustee. They’ll be able to review your finances and make recommendations based on your unique situation. They will be able to determine what you can afford, if you need legal protection from your creditors, and discuss your financial goals to help you become debt-free.