I think you’ll really agree with me when I say that the debt industry is really confusing.
You have credit counselling societies, bankruptcy trustees, debt settlement firms, consolidation loans, consumer proposals, and a lot of different views on how you should deal with your debt.
The media also chimes in, leaving more confusion than answers. Some articles say you should avoid bankruptcy. Other blogs say that you should not use consumer proposals as they can impact your credit.
It a lot of information to take in.
And when you are deep in debt and possibly losing your business or house, it can be an overwhelming time to learn about all of these options.
Well, it turns out that it’s WAY easier to understand the difference between consumer proposals and bankruptcy if you understand the major players in the debt industry.
And in today’s post, I’m going to explain in plain terms the full range of options for debtors in Canada.
I’ll talk about consumer proposals vs. bankruptcy and give you some other options as well.
So consumer proposal vs. bankruptcy?
I’ve worked in financial services for 20+ years. Based on this experience, here’s a basic answer to choosing between a consumer proposal vs. bankruptcy.
Bankruptcy is really a drastic measure that has far-reaching financial consequences. While it is emotionally attractive (“start fresh with no debt”), it is not a simple process and really should be seen as a financial last resort.
A consumer proposal, which does have pros and cons, is generally preferable to filing bankruptcy.
How the debt industry works in Canada
If you are thinking about a consumer proposal, debt consolidation, or bankruptcy, then you will likely encounter these players.
Why read about this?
It’s important to remember that debt is still an industry. Despite what your friendly bankruptcy trustee says, they still make money from your debt.
Even the non-profit credit counselors are making money from your debt, which I’ll talk about later.
So let’s go through the different players in the Canadian debt industry. My intent is to break things down into very simple and concrete terms.
If you have good credit, good income and a manageable debt load but need to consolidate your debt payments into one monthly payment to make life easier, your local bank should be able to help you with a consolidation loan at reasonable interest rates.
The Credit Counsellors
Credit Counsellors will be discussed more later. As they rarely have the ability to reduce your debt and still have a significant impact on your credit rating, a better alternative would be a consolidation loan. If you don’t qualify or can’t easily afford the payments then you should also review the other options listed.
Debt Settlement Firms
A lot of US debt settlement firms have surfaced in Canada as debt levels have now surpassed the US. Here is a very brief overview of how a debt settlement firm works.
They attempt to informally settle with your creditors (see above) but in order to do so you need a lump sum payment to offer the creditors which most people in financial difficulty don’t have.
A debt settlement firm be it US or Canadian will set you up on a monthly payment plan to create a pool of cash that can then eventually be used to settle the debt. Depending on the debt load this can take between 12-36 months.
In the meantime, they ask you to stop paying the creditors. But you have no legal protection from your creditors taking action to collect the debt.
What we are seeing in the industry now is that when creditors are receiving settlement offers from debt settlement firms, they are escalating the legal process to force the consumer to either pay the debt or take a different approach to deal with the debt by filing under the Bankruptcy and Insolvency Act.
The Bankruptcy Trustee
The Bankruptcy Trustee plays a critical role in debt restructuring and any formal restructuring plan filed under the Bankruptcy and Insolvency Act requires a trustee.
Let’s look at the definition of the role of the trustee:
‘The trustee is an officer of the court who acts on behalf of the creditors in a fiduciary capacity’
The fiduciary responsibility is very powerful. A fiduciary is a legal or ethical relationship of trust between two or more parties. In other words, the Bankruptcy Trustee works for your creditors, not for you.
From this, we can see the responsibilities the trustee holds and the duty of care they have for the creditors.
If you approach the trustee directly to file under the Bankruptcy and Insolvency Act they will determine which assets are exempt and which assets are available to the creditors and if you file a consumer proposal they will determine the terms to which the proposal will be filed.
The other piece to remember is there are over 800 trustees in Canada and they all have different ways they interpret the Bankruptcy and Insolvency Act which can have a significant impact on any restructuring plan you enter.
And then us . . . 4 Pillars Consulting Group
4 Pillars falls into a category all its own, and here’s why: the role of 4 Pillars is to represent the interest of the debtor, not the creditor.
That is our sole mandate, and everything we do is governed by this.
We educate the consumer about all the options available so they can make an informed decision about the best plan to deal with their debt.
We represent the debtors when structuring a consumer proposal to ensure the terms are agreed based on the long-term financial goals of our clients – “the debtors”.
We have a network of more than 100 trustees we use, depending on the individual needs of the debtor.
Think of it like the role of a mortgage broker, with access to hundreds of mortgage lenders to obtain the best rate and terms for you, versus your bank that has access to only the bank’s mortgage products.
4 Pillars has one of the most comprehensive credit rebuilding plans in Canada.
The goal is to get your credit score to 650 as quickly as possible. 650 is the magic number the traditional banks see as a sign of a customer who is rehabilitated.
With the 4 Pillars plan, you can get there in as little as 18 months.
Common debt options in Canada
I’ve talked about the major players. So let’s now move into the most common tactics Canadians choose for dealing with large amounts of debt.
The pros of consolidation loans:
This allows you to avoid personal Bankruptcy or any other type of debt restructuring and will likely reflect more positively on your credit rating.
The terms of repayment may be more manageable than making a number of payments to all the debts individually and the interest rate on the loan may be more reasonable than on the individual debts.
The problem people face is when debt levels are simply too high and consolidating the debt is simply replacing one debt for another – and the payments may still be unmanageable.
Your credit score and your income will determine if you qualify for a consolidation loan and this may require a co-signor and/or security and depending on how the lender assesses the risk could result in a higher interest rate.
The cons of consolidation loans:
Now the debt and the risk are also associated with the co-signor and/or you have the potential to lose any security pledged.
When obtaining a consolidation loan there is no potential to negotiate the amount of debts which is ultimately the best way to reduce the payment and provide a strategy to actually repay the debt unless you can considerably lower the interest rates.
Credit Counselling and Non-profit Credit Counsellors
You’ve likely seen their TV ads. Credit counselors offer free advice and consultations. Here’s what you need to know about non-profit credit counsellors in Canada.
The pros of credit counselling
The fees paid by the debtor are usually minimal but rarely do they offer less than 100% of debt repayment. They can usually reduce the interest rates on future payments.
The cons of credit counselling
Well, nothing in this world is free.
The Non-profit Credit Counsellors are usually financed by creditors. The debtor pays the credit counselling society and they pay creditors.
You will also not be paying back your debt on the original terms and conditions. This is similar to breaking a contract with your creditor. So, you will get an R7 on your credit rating for the length of time it takes you to pay off the debt (usually 5 years) plus an additional 3 years (8 years in total).
In other words, your credit rating will be impacted and you’ll pay most of your original debt back.
Informal proposals are exactly what they sound like: an informal offer you make to your creditors, asking for financial leniency.
The pros of an informal proposal
This involves directly negotiating a one-time settlement with each individual creditor.
The repayment can be structured based upon the debtor’s ability to pay but usually requires a lump-sum one-time payout where creditors agree to accept a lesser amount.
This will usually require showing the creditors details around your current financial situation and an explanation of your financial hardship.
The cons of an informal proposal
The creditors are not obligated to settle but will if they feel the offer is a better return… than if you declare bankruptcy.
An informal proposal is a direct request to each individual creditor. A consumer proposal is an offer to all your creditors and gives you legal protection from the creditors as it is filed with a Bankruptcy Trustee under the Bankruptcy and Insolvency Act.
How a consumer proposal works
A consumer proposal is a formal offer to all your creditors made through the Bankruptcy and Insolvency Act.
It is a provision available to debtors that need new terms to repay the debt and want to avoid filing bankruptcy.
The proposal must provide creditors with more than they would receive if the debtor filed bankruptcy.
Certain debts, such as alimony or maintenance, cannot be included in the proposal. A Bankruptcy Trustee is required to make any filing under the Bankruptcy and Insolvency Act.
The pros of a consumer proposal
If the majority of creditors accept the proposal it is binding on all creditors.
You are protected by laws and the process is formalized.
If accepted, you will pay only a portion of what you owe and potentially eliminate thousands of dollars in interest.
Filing a consumer proposal places a legal stay of proceedings in effect, meaning no creditors can take any action to collect the debt.
The cons of a consumer proposal
If creditors don’t accept the deal then the consumer is in the same position they were in prior to filing.
This reflects as R7 on your credit rating for the length of time it takes to repay the proposal (usually 5 years) plus an additional 3 years (total 8 years).
A brief note, 4 Pillars has a program that can reduce the impact on your credit rating to as little as 3 years.
Bankruptcy is a formal arrangement and binding on creditors. The debtor applies for legal forgiveness of debt and the process can last between 9 and 36 months.
The pros of bankruptcy
You get a fresh start.
The cons of bankruptcy
You may lose some or all of your assets including your home, RRSPs, savings, investments, and other assets.
Bankruptcy has the most severe impact on your credit rating and reflects as R9 on your credit rating for 6 years after the discharge period.
The debtor is required to complete monthly income & expense reports for the length of the bankruptcy and the monthly bankruptcy payment is determined by income and family size and is monitored throughout the term of the bankruptcy.
An increase in income can increase the payments and also extend the term of the bankruptcy.
When a consumer declares bankruptcy they hand over all their non-exempt assets to the Bankruptcy Trustee and these are liquidated and the funds given to the creditors.
So which option should you choose?
Now that you understand the options, we need to look at what makes a plan to deal with debt successful.
The key is to deal with debt as part of your long-term financial plan. You need to clearly understand your long term financial goals and then look at all the options you have available.
How to build a really solid debt plan
The two key areas that are often missed when creating a plan to manage debt are the pre-work (analyzing cash flow) and the post-work (implementing a comprehensive credit rebuilding plan and how to use any additional cash flow to meet long term financial goals).
These are ultimately the cornerstone of a solid debt restructuring plan and can be the difference between success and failure.
I really believe this and it’s why my company helps Canadians organize their finances beyond their financial crisis.
4 Pillars looks at the bigger picture
Our approach to getting you out of debt looks at the big financial picture.
We could just sell you a consolidation loan.
Or tell you to file bankruptcy and collect a fee.
Or offer you free advice–but at the same time be ultimately working for your creditors.
But we feel that most debt solutions are very short-sighted and that is why such a high percent fail (estimated to be 50%).
Getting out of debt is only one half of the problem. The other is the circumstances and habits that brought you here and how you are going to create financial stability after.
I believe that a debt management plan needs to account for the larger picture.
1. Understand – your future financial goals
2. Focus on your debt – Explore all the options available to you to help reduce and eliminate debt and review them based on achieving your long term financial goals.
3. Rebuild – Establish a positive credit history
4. Cash Flow – Use the extra cash flow for achieving your long term goals.
This will allow you to:
1. Save towards your children’s education
2. Increase your retirement savings
3. Pay down your mortgage or other secured debt
4. Establish an emergency fund for unexpected expenses
5. Save for a vacation
98% of people entering into a debt restructuring plan with 4 Pillars successfully complete the program and we believe this is the highest in the industry.
I really hope this has helped a bit.
Please do reach out to us. We can help you.
Get a professional assessment of your debt situation
Your job is to educate yourself.
If you are carrying a large amount of debt, speak to a professional. You can find experts by searching in your city.
We also have offices across Canada, which you can talk to on the phone, email, or meet in-person.
What does an expert know that you don’t?
They will teach you about debt restructuring options such as debt consolidation, consumer proposals, informal proposals, and how to approach your creditors with a restructuring offer.
They will also be able to analyze the type of debt you carry and educate you on the right choice for you.
You can sometimes reduce your debt with restructuring, get out of debt by creating a solid budget and for others, bankruptcy might be the right choice.
Here’s a list of our offices in your city. Ontario
- Barrie office
- Belleville office
- Brampton office
- Burlington office
- East Windsor office
- Etobicoke office
- Guelph office
- Hamilton office
- Kitchener office
- London office
- Markham office
- Mississauga office
- Newmarket office
- North York office
- Orangeville office
- Oshawa office
- Ottawa office
- Peterborough office
- Port Hope office
- Sarnia office
- Waterloo office
- West Windsor office
- Burnaby office
- Fraser Valley
- Kamloops office
- Kootenays office
- Nanaimo office
- North Vancouver
- Prince George office
- Richmond office
- Ridge Meadows office
- Surrey office
- Vancouver office
- Vernon office
- Victoria office (Langford)
- Victoria office (downtown)
And finally, here are real stories about debt from Canadians who survived their financial crisis.