The following is a guest post from Debt.ca.
If you’re struggling with debt, you’ve likely started to notice all of the different signs, ads, and websites that say there are ways to get out of it. Unfortunately, getting out of debt can be a lengthy process – and the terminology used to explain your options is often confusing, making a tough decision even more difficult. Today, we want to explain your options and make all of the information crystal clear.
What is Debt Relief?
Debt relief is an umbrella term for any official strategy that lowers your debt obligation. The most common debt relief options are:
- Credit Counselling
- Debt Consolidation
- Debt Settlement
- Consumer Proposal
We’ll assume you’ve tried everything you can think of to get out of debt on your own, and now it’s time for professional help.
For each relief option, you’ll work with a professional debt specialist who will take the time to answer your questions and guide you through the process.
1. Credit Counselling
You know you need help and a professional credit counsellor is a great first step. By looking at your income, expenses and debt, a counsellor will help you create a plan and guide you so you stick with it.
This may include negotiating with creditors to reduce interest rates and lowering monthly payments to make everything more manageable. Once the plan is set up, it’s up to you to execute.
Disadvantages of Credit Counseling
Many non-profit credit counselling companies are actually funded by creditors. This is an obvious conflict of interest, making credit counsellors basically friendlier and more helpful debt collectors. If your debt is less than $10,000 and you mostly need help with managing money and a budget, this might be a good option – otherwise look at other solutions.
2. Debt Consolidation
Keeping track of your debts can be frustrating and, if you’re always stressed about which bill to pay first, debt consolidation might be the best option for you.
Consolidating your debt is exactly what it sounds like – combining all of your debts into one single debt, ideally with a lower interest rate. This single debt is structured to give you a single monthly payment that’s manageable with your budget.
Advantages of a debt consolidation program are:
- One lower monthly payment – easier to track, easier to pay and easier on your budget
- Lower interest rate – pay off your debts faster by putting more towards your principle with every payment
- Creditors get paid on time – even though you’re paying one bill, each of your creditors is getting their piece, which means your credit rating won’t take as big a hit
Disadvantages of Debt Consolidation
Unlike debt settlement, you’re not actually lowering the amount you owe, so it will take a lot longer to pay the debt off. As well, some people fall into the trap of building even more debt as soon as they have ‘room’ to borrow again. Don’t do this!
3. Debt Settlement
With a high debt load, it’s easy to fall behind on your monthly payments, even though you WANT to stay current. Debt settlement companies will negotiate with your creditors on your behalf and help you reduce the total amount of debt you owe by 50%-70%; this means you’ll have a much more manageable monthly payment.
Debt settlement is best for people who are deep in debt and seriously considering a consumer proposal or bankruptcy. You can typically get out of debt in 12-36 months with a debt settlement program.
Disadvantages of Debt Settlement
Your credit will take a hit by going through this process, but it is less expensive and kinder to your credit rating than a consumer proposal or bankruptcy. You may still receive calls from debt collectors, and there is a remote chance that your credit card company would sue you.
4. Consumer Proposal
This innocent-sounding strategy is actually a short step away from bankruptcy and, in fact, can only be performed through a licensed bankruptcy trustee.
The trustee works on your behalf to mediate with your creditors and come up with a debt repayment proposal that includes lowering the principle owed and consolidating your bills while also lowering the interest rate.
A consumer proposal only works for unsecured debt, such as credit cards, and won’t help with mortgages, car loans or student loans.
Disadvantages of Getting a Consumer Proposal
Consumer Proposals become public record and are handled through the bankruptcy courts (your credit report will show an R7 rating). Your trustee is obligated to pay your creditors as much as they can, so always remember who’s side they’re on.
Every debt relief option has consequences, and it’s crucial that you understand what’s best for your situation. To get started, calculate your total debt and then use a debt repayment calculator to see how each strategy affects you.
No solution is right for everyone, but if you can’t manage your debt on your own, there IS a strategy that’s right for you.