This article is by Paul Murphy, our Managing Partner with 15+ years of investment and banking industry experience. If you’d like advice about your particular situation, reach out here.
How Debt Restructuring Works in Canada
In simple terms, debt restructuring is a proposal made to your creditors where you offer to repay the debt on different terms than you originally agreed to and often paying back a reduced amount and on terms that are affordable to you.
For a family struggling to meet its financial obligations there are options and It’s a huge misconception that you must pay down your entire debts or go bankrupt, in the same breath it is a huge misconception that you can go through a debt settlement/restructuring plan without an impact on your credit rating.
It can be unreasonable to assume that a family with 50K in unsecured debt and struggling to maintain the minimum payments that they can sustain that level of financial pressure without falling deeper and deeper into debt and becoming vulnerable to high interest lenders of last resort.
Once your debt climbs to a point that your income can no longer sustain the payments and you have no available credit left to subsidize your income, creditors realize that you may consider filing for bankruptcy.
Creditors know that if you do file for bankruptcy they may end up with nothing. Debt settlement is a way for creditors to salvage some of your debt and it begins with a new proposal made to your creditors.
Once a creditor accepts your proposal, you will either make monthly payments or a one time payment to settle the debt. If done correctly this allows you to finally pay down the principle on affordable terms, rebuild your finances, regain control over your cash flow, and put debt behind you.
Does debt restructuring ruin your credit rating?
One of the most common objections to debt restructuring is that it damages your credit rating.
But the reality is that your credit score shouldn’t be the sole criteria you have when looking at your different debt repayment and settlement options and you should look at the impact the debt repayment is having on meeting your long term financial goals.
Your credit rating can be improved and reestablished after your debt restructuring proposal has been accepted by your creditors but the money you payout each month to service the debt is money that is gone and can not be replaced.
Now, this is a hard hurdle for many people in debt. They’ve been taught that their credit rating needs to be preserved at all costs.
But this attachment to your credit rating can cost you thousands and thousands of dollars. For example, your credit rating can be improved in a matter of years; whereas, it can take a decade to pay down $50,000 in unsecured debt.
When considering the impact of debt settlement on credit ratings, you should also remember that bankruptcy results in an R9 credit rating.
A consumer proposal results in an R7. The good news is that in both cases the downgrade in credit rating does not last forever. You can read more about the impact of debt restructuring on your credit rating here.
In the case of a consumer proposal, you can start to repair your credit immediately through various products and options available to you.
With bankruptcy, an individual must first be discharged, but once ‘out of bankruptcy’ the credit rebuilding process can begin. Credit can often be repaired within 18-24 months with the implementation of a detailed credit rebuilding plan.
Ironically, many debtors have excellent credit ratings yet no clear roadmap for becoming debt free and building true wealth in savings or investments. All of their cash flow simply goes towards servicing debt and paying interest.
This is of great benefit to their creditors but a serious roadblock to developing a long-term solution to your financial hardship.
It’s understandable that you want to pay your creditors on time to maintain a good credit card rating, but then you end up with little left for living expenses, causing the debt cycle to continue.
So when you are drowning in debt, something has to give. One option is to restructure your debt and to get into a monthly payment that you can actually afford. You can then work to rebuild your credit rating.
How much will debt consolidation save you?
Most Canadians are quite surprised at how much their debt can be reduced. Below is a chart that shows how much the average Canadian can expect to save with debt restructuring.
The chart below is based on a Canadian with $48,000 of unsecured debt, which is the average amount we see when families come to us.
|Client Options||Monthly Payment||Years to Debt Free||Total Repayment||Credit Rating Impact|
|Do Nothing||$1091.63||10 years||$130,994.38||10 years|
|Credit Counselling (60 month program)||$905.82||5 years||$54,349.16||8 years|
|*Regular Consumer Proposal (60 month program)||$280.00||5 years||$16,800||8 years|
|** Credit Acceleration loan (lump sum proposal)||$331.52||4 years||$15,912.74||3 years|
* Based on average monthly payment consumer proposal accepted at net 25 cents ($16,800).
** Based on average lump sum consumer proposal at net 13 cents ($10,000) lending fees may apply. When should you use debt settlement?
While it makes sense to want to pay back your creditors, the sad fact is that those attempting to pay their debts month to month are on a path that often has no end in sight for many years – even decades.
Someone with debt of $40,000 is paying anywhere from $800 – $1200 a month, just to service the debt. At that rate, the debt won’t be paid off for 5 to 25 years (depending on the amount paid each month and the interest rates).
All that money put towards paying off large debts bit by bit is money that can never be recovered. The person in debt may have a solid credit rating, but their bank account is emptying at an alarming rate.
In other words, the debtor’s stellar credit rating is decimating his or her bank account.
Learn about your debt restructuring options.
We offer Canadians detailed information about the different options every debtor has.
You can meet in-person at a local office or just receive more information via email.