Discover debt relief options

Debt can feel like an impossible hurdle. One day you feel like you have made progress towards repayment and the next day interest charges come out and you’re further behind than before. If you’re struggling with overwhelming debt, know that you’re not alone. There are programs designated to help those struggling with their finances and thousands of Canadians utilize debt relief options every year.

Understanding debt relief in Canada

Many Canadians are unaware of the options they have to reduce the total debt they owe creditors . Depending on your current financial situation, there are several formal and informal routes to reduce or eliminate debt.

1. Bankruptcy

Bankruptcy is a legal process designed to eliminate most unsecured debts and give individuals a fresh financial start. It’s a big commitment and should not be viewed lightly.

How it works:

• Filing for bankruptcy is a legally binding commitment and can only be executed by a federally regulated individual called a Licensed Insolvency Trustee (LIT)
• You may be required to surrender certain non-exempt assets, which will vary depending on the province that you live in
• You will be required to make monthly payments based on your income and expenses (called surplus income payments) and attend two financial counselling sessions to be discharged from your bankruptcy

Pros:

• Eliminates most unsecured debts, including credit card debt and payday loans
• Stops collection calls, wage garnishments through an act called a stay of proceedings
• Provides a structured path with a clear timeline

Cons:

• Significant impact on your credit score (remains on your credit report for up to seven years)
• Not all debts are discharged (e.g., student loans under seven years old, child support, or court fines)
• It’s not easy to rebuild and will time and effort

Bankruptcy is a viable option if your debts are unmanageable, and you’ve explored all other options. Remember, it is not easy- but it’s worth it.

2. Consumer proposal

A consumer proposal is a legally binding agreement between you and your creditors to settle your debts through a manageable monthly payment plan.

How it works:

• Proposals are administered by a Licensed Insolvency Trustee
• Creditors vote to accept or reject the proposal. Once the majority approves, it’s binding on all creditors, even those who didn’t agree. If the majority vote against the proposal, you’ll be offering a larger payment or explore other options like a bankruptcy
• Payments are spread over a maximum of five years

Pros:

• Allows you to keep your assets (home, car, etc.)
• Creditors often agree to reduce the total amount owed
• Protection from collection actions and lawsuits
• Stops payments from growing due to additional fees and penalties
• If your financial situation improves, you can pay off the term faster without penalty

Cons:

• Credit impact — remains on your report for three years after completion or six years from filing
• Requires regular payments over the agreed term
• A consumer proposal is best for those who can repay a portion of their debt but need relief from the full burden and consistent communications from creditors

3. Credit counselling and debt management plans (DMPs)

Credit counselling is a service that helps you manage debt through education and negotiation. It often involves creating a Debt Management Plan (DMP), where you make a single monthly payment to your credit counselor, who then distributes it to creditors.

How it works:

• Credit counselors negotiate lower interest rates or fees with creditors on your behalf
• You commit to repaying the full debt amount owed over a period of 3 to 5 years
• DMPs are not legally binding, and you’re not offered a stay of proceedings. Additionally, your creditors may choose not to participate

Pros:

• Avoids bankruptcy or a consumer proposal leaving a less severe impact on your credit
• Helps you learn better financial management

Cons:

• Does not reduce the principal amount owed
• Creditors are not obliged to participate
• Collection calls may continue from creditors not included in the plan

Credit counseling is a good option for those with steady income and manageable debt levels who want to avoid formal insolvency proceedings.

Should you ignore your creditors?

Ignoring creditors is never a good idea. While it may feel tempting to avoid the stress of dealing with them, it will not help your current situation. While it’s often a difficult move, consider picking up the phone and being honest with your creditors. By explaining what led you to be behind in payments , they may be willing to work with you directly to temporarily freeze or reduce interest or give you more time to catch up on missed payments.

What creditors can do:

1. Collection calls: Creditors or collection agencies may contact you to recover debts

2. Wage garnishment: In some cases, they can obtain a court order to deduct payments directly from your paycheck. In this case, your employer will be made aware of the debt

3. Legal action: Creditors can sue to recover debts, potentially leading to the seizure or freezing of assets or bank accounts

4. Damage to your credit: Late payments or defaults are reported to credit bureaus, harming your credit score. This can have a big impact if you’re looking to build credit i n the future including buying a home, financing a car or obtaining a credit card

If you’re unable to pay, talk to your creditors first or work with a to explore your options. Legal protections like bankruptcy or a consumer proposal can stop creditor actions and provide you with support.

Recognizing the signs of financial distress

Debt often doesn’t happen overnight — understanding common triggers and recognizing the signs of distress can help you take action early for yourself or loved ones.

Common triggers for financial trouble:

1. Job loss or reduced income: A sudden reduction in income can make it difficult to keep up with debt repayment on top of everyday expenses
2. Overuse of credit: Using credit cards to cover everyday costs often leads to a cycle of debt
3. Unexpected expenses: Medical bills, home appliance repairs, car repairs or legal fees can unsettle financial stability
4. Life changes: Divorce, separation or the birth of a child are often a top contributor to financial stress
5. Economic factors: Rising inflation or interest rates can increase living costs or debt repayment burdens
6. Housing costs: The housing market has found many Canadians paying more for rent or unable to save for a house purchase

Signs you may need help:

• Missing or delaying bill payments
• Only paying minimum balances and juggling which bills to pay when
• Relying on payday loans or high-interest credit
• Receiving collection calls or legal notices
• Borrowing from one creditor to pay another

Recognizing these signs early allows you to review your situation and determine what the next steps are.

Helping others

If you suspect someone close to you is struggling and want to offer support here are some signs to recognize and how you can help:

Signs of financial stress in others:

• They repeatedly borrow money or ask for financial support
• Their lifestyle changes dramatically, this could include selling possessions or downsizing unexpectedly for what appears to be no reason
• They avoid social activities that they previously engaged in or seem unusually stressed
• You notice unopened bills or constant phone calls from what may appear to be creditors

How to help:

• Approach the topic with compassion and without judgment
• Offer to help them research solutions, such as credit counseling or meeting with a Licensed Insolvency Trustee
• Talk about your own financial story including pitfalls and any experiences you had that helped you overcome the challenges
• Encourage them to seek professional advice to explore debt-relief options

Taking the first step toward financial freedom

If you’re exhausted by debt, it’s important to remember that you’re not alone and that help is available. You’re in control of what happens next in your journey.

1. Review your situation: Make a list of all your debts, income, and expenses to get a clear image of where your finances stand
2. Know your options: Research solutions like bankruptcy, consumer proposals or credit counseling to find the best fit. Read online reviews to see what organization may be the right fit for you
3. Seek guidance: Schedule a consultation with a Licensed Insolvency Trustee to discuss your options. You don’t know what you don’t know, so understand that you have options and what steps you can take next
4. Create a budget: Whether you decide to file for insolvency

You’re in control of what happens next

Debt can feel suffocating. Debt doesn’t have to define you who you are or where you will be in the future. Whether through bankruptcy, a consumer proposal o r credit counseling, there are proven solutions to help you regain control of your finances in Canada.