Is debt settlement today is a good thing?

^{By Bromwich+Smith Staff | 1000 words | Reading Time: 5 minutes| Date: 2023/12/15}

In Canada debt settlement is a financial strategy that helps individuals regain control of their financial situations. It allows them to work towards a debt free future by negotiating with creditors to reduce the total amount of debt owed. For many with overwhelming debt, a settlement program is a good option to allow them a fresh start.  

Debt settlement allows financial recovery 

One of the main reasons why debt settlement is a good option in Canada is that it provides a clear and concise path to financial recovery for those struggling with overwhelming debt. Many individuals find themselves trapped in a cycle of debt, facing high interest rates and fees and feeling constant pressure to repay the debt owed. Debt settlement in Canada allows individuals to negotiate with their creditors to lower the outstanding debt which in turns makes it more manageable to payoff the debt. Debt settlement can typically reduce the amount of debt by up to 50%. With a lower debt total participants are able to regain financial stability and work towards a debt free future. 

Debt settlement may prevent bankruptcy 

We understand the stigma around the word bankruptcy. For many it is something they avoid at all costs based on the fear and embarrassment with the word. Bankruptcy does not need to be viewed as a shameful choice, however. While it is typically the final option reviewed, bankruptcy is a powerful resource. Debt settlement may be one of those options that can prevent individuals from reaching the point of filing for bankruptcy, as it allows individuals to retain control over their assets and finances and protecting their overall financial well-being.  

Debt settlement allows for a fresh start 

Debt settlement reduces the amount of debt and allows individuals to focus on rebuilding their financial health. This provides a significant advantage for anyone looking to secure additional credit including loans, mortgages or credit in the future. With debt settlement Canadians can avoid high term consequences that comes with high levels of debt. Carrying a high debt to income ratio may make it challenging to access credit which results in a higher interest rate, less favorable terms and limit financial opportunities. 

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The disadvantages to debt settlement 

We've looked at some of the advantages to debt settlement but it's important to look at the potential downside as well. 

1. Negative impact on credit score. One of the significant drawbacks of debt settlement is an immediate impact on your credit score. When you settle debt for less than the full amount owed the creditor will likely report this debt as settled or partially settled. This has the potential to lower your credit score for an extended period of time which in turn will make it more challenging to secure credit with favorable interest rates in the future. 

2. Tax implications. In Canada debt forgiveness through debt settlement may be considered taxable income. This means you may be required to pay income tax on the forgiven portion of your debt resulting in an unexpected tax bill. There are exceptions to this, so it is crucial to consult a tax professional to understand the tax consequences with your unique situation. 

3. Fees and costs. Debt settlement organizations will typically charge fees for their service. They may require upfront fees or charge a percentage of the debt that is settled on your behalf. These fees can add to your financial burden and reduce the actual savings achieved through settlement. Debt relief consultation with a Licensed Insolvency Trustee will always be free with no cost and no obligation. It is important to research the debt program that you were inquiring about prior to signing an agreement. Some organizations like Licensed Insolvency Trustees are regulated through the government with their fees clearly stated. Debt settlement companies typically do not fall into the same category and may charge fees based on their own fee schedule. 

4. Creditor rejection. Creditors are not obligated to accept any settlement offer and they may refuse to negotiate with settlement companies. This means that despite your efforts you may not be successful in reducing your debt through debt settlement program. If your settlement was not accepted, you may be responsible for paying fees anyway. 

5. Potential legal action. While your creditors may agree to settle your debt there's also the risk of legal action. If the negotiations fail your creditors may pursue legal action to collect the debt in full potentially leading to wage garnishment or liens of your assets. Only a Licensed Insolvency Trustee can offer you a stay of proceedings which means that your creditors cannot come after you to collect the full debt owed. 

6. Limitation on debts. Settlement is more commonly associated with unsecured debts including personal loans and credit cards. It may not be an option for secured debts including mortgages, car loans, student loans and more. 

7. The waiting game. You may find yourself waiting to hear the outcome of negotiations as debt settlement is not guaranteed. You may invest time and money in the process without achieving the desired results. Debt settlement can also strain relationships with your creditors and collection agencies which could lead to increased phone calls and aggressive collection tactics. 

Debt settlement can be a valuable financial strategy for Canadians burdened with debt. It offers a clear financial recovery, prevents bankruptcy, and provides a fresh start for those looking to manage their finances. While it may not be the right choice for everyone, it is a viable option for some. If you are facing overwhelming debt, we urge you to speak to a debt relief specialist. Learn more about debt settlement options as well as federally regulated debt relief programs like a Consumer Proposal or Bankruptcy. By speaking to a government-regulated professional you will have all of the resources needed to make the right choice for your unique financial situation. 

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Bromwich+Smith has a number of debt relief strategies to help you regain control of your finances and get your life back on track. Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at   1.855.884.9243, Live Chat or you can request a call back at contact us page. We want to see you flourish!