Taking Control of Your Finances — Consumer Proposals and Debt Settlement
In my most recent blog, Taking Control of your Finances with a Budget, I wrote about the need to sit down and analyze your household incomes and expenses. The blog was a simple and straightforward tool to assist in getting a household budget together.
So what do you do if you have gone through the budgeting process, cut all the corners, and shaved as much as you can from the household expenses and you’re still short at the end of the month? What if you are on the credit treadmill of constantly moving monies from one card or line of credit to the other and you cannot get ahead of the interest and debt that has accumulated in the household?
At this point, it is time to solicit the help of a professional to assist with debt settlement arrangements or a consumer proposal. Generally speaking, and depending on how large the debt gap is in your budget, you will have three or four basic options.
Sitting down with a Licensed Insolvency Trustee (LIT) for a free, no-obligation assessment of your financial situation is a good first step in reviewing these options. An LIT is an individual licensed by the Federal Government to administer the Bankruptcy and Insolvency Act.
They will review your current situation and provide information on viable options, including the consumer proposal process or a personal assignment in bankruptcy. (I’ll talk more about bankruptcy in next week’s blog.) In addition, an LIT will review the severity of your personal debt situation and will provide information and referrals on your other informal options.
These options include reworking your budget and implementing a do-it-yourself debt repayment plan, or information on debt management plans offered by not-for-profit credit counsellors or for profit debt settlement entities.
Bankruptcy is always a last-resort option
Often when I’m contacted by an individual who’s worried about their debt, they do not want to come to see an LIT because they are afraid of talking about bankruptcy. I try to reassure everyone that a free no-obligation consultation is just that, a consultation — an informative discussion about options. You cannot catch bankruptcy like a cold, so speaking to an LIT and learning about all of your options shouldn’t have anything attached to it other than the benefit of knowing that you are taking control and putting a plan together.
Option one: revisit your budget and reach out to creditors for help
If your debt situation has not deteriorated to a point where creditors are threatening legal action or have assigned your debts to a collection agency, there may be time to put a plan in place on your own. Consider strategies such as the following:
- Make a list of all your debts, from highest interest rates to lowest. Pay off your debts with the highest interest rates first (like credit cards) and work through the list.
- Contact the credit card companies and ask for an interest rate reduction.
- Cancel add-on products such as purchase insurances or life insurances. This may just tilt the balance in your favour.
- Reach out to your bank/mortgage holder and speak about obtaining a consolidation loan or a second mortgage. Generally debt secured against an asset has a lower interest rate and can be amortized (or paid off) over a longer time period.
Once again I restate the caution of an earlier blog where I noted that if you obtain a second mortgage or consolidate against the equity in your home make sure that it is part of a larger strategy that will solve your debt issues. Remember to cut those credit cards up so as to not compound the debt problem by getting back into the habit of relying on credit.
Option two: contact a debt consultant or not-for-profit credit counselling agency
If creditors are calling and collection agents are threatening legal action, your debt situation has likely escalated beyond where you can manage the repayment process on your own. Once again, an assessment by an LIT may be valuable. If your situation warrants it, an LIT might refer you to a credit counsellor, or you may wish to contact a credit counsellor on your own.
A quick internet search will reveal a number of agencies that will in general terms review your debt load, develop a budget and attempt to find some repayment amount that the creditors will accept usually paid over several months or years. The costs associated and the success of the plans and its effects on your credit rating will vary so we recommend you do your research and check into the various programs before you lay out monies for services. You can learn more about the different debt options here. Or find a local not-for-profit financial counsellor at Thunder Bay Counselling.
Option three: file a consumer proposal
A consumer proposal is a formal arrangement that you make with your creditors. It allows for repayment of a portion of your debt over a period of time, up to and including 60 months.
Generally, the proposal allows for a discounted repayment to your creditors of a cents-on-the-dollar offer that is voted on by your creditors. Unlike a debt management plan, a consumer proposal is filed using the Bankruptcy and Insolvency Act and has the benefit of being able to stop garnishments, wage assignments and collection activities.
The extra legislative power of the consumer proposal means that it is often the necessary debt settlement tool needed if your creditors have sued you and have obtained a garnishment or an execution against you or the title to your home. Unlike a bankruptcy, a consumer proposal helps you to retain your assets and settle the debts at the same time.
A consumer proposal can only be filed by a Licensed Insolvency Trustee. You can learn more about the consumer proposal process on the BDO First Call Debt Solutions website and on this Government of Canada website
So there you have it — what to do if you have spent the time working on a budget and tightening the proverbial belt and you still are coming up short on a monthly basis. The path to regaining financial control often requires help from a debt relief professional. I am hopeful the information provided points you down the path to greater financial well-being.
Jayson Stoppel is a Licensed Insolvency Trustee and Chartered Accountant with BDO First Call Debt Solutions. With over 15 years in practice, Jayson assists individuals, families and companies with financial difficulties in Thunder Bay and throughout Northwest Ontario. To reach Jayson by email: JStoppel@BDO.ca
