Understanding Options for Debt Help in Ottawa to Find the Best Solution for You
They both involve paying your creditors over an agreed-up time frame. They also both pool together your debts so you only have to make single monthly payments instead of multiple payments.
Both debt help options also have similar impacts on your credit report. These will stay on your credit report for three years after completing the debt payments. Although these two options are similar, the best option for you will depend on your financial situation and the level of creditor protection you need.
To help you decide which debt solution is best for you, here is a comparison of debt management plans and consumer proposals in Ottawa.
What Is A Consumer Proposal?
A consumer proposal is a debt solution administered by a licensed insolvency trustee. This solution is only for those who are insolvent—debtors who cannot repay their unsecured debts in a reasonable time.
With a consumer proposal, your trustee will act as an administrator to negotiate a settlement with your creditors. This proposal usually requests that:
- You pay back less than the full amount owing within a specified timeframe (with a maximum period of five years);
- The amount you pay back has zero interest; and,
- You have creditor protection.
You can increase your monthly payments to pay off your debt in a shorter period, but you cannot extend your payment period set out in your proposal.
The consumer proposal will make an offer to settle with your unsecured creditors, which they can accept, amend, or reject. They typically have 45 days to make a decision.
If more than half of all votes by your creditors accept the proposal, then the proposal is approved and all of your creditors are legally bound to accept it, whether they voted yes to it or not.
This legally-binding contract between you and your creditors means they must stop collection calls, wage garnishments, and legal action.
Note that you can also include debts to the Canada Revenue Agency in a consumer proposal.
Who Is A Consumer Proposal Ideal For?
Consumer proposals are ideal for those:
- Who cannot afford to repay their debts in full in a reasonable amount of time (insolvent);
- Who need reduced monthly payments to their debts; and,
- Whose debts are higher than $10,000.
For example, say you owe $60,000 in credit card debts. This debt, plus the additional interest which could result in you owing upwards of $100,000. This debt will take years to pay off, and it’s possible that you may never be able to afford to repay this debt in full.
But with a consumer proposal, your bankruptcy trustee may be able to negotiate a settlement in which you pay only half of your debt—$30,000—with monthly payments of $500 for 60 months, or five years.
What Is A Debt Management Plan?
A not-for-profit debt or credit counsellor will administer a debt management plan on your behalf. Your debt counsellor will pool your existing debts together and negotiate a settlement with your creditors.
This settlement involves you repaying your debts in full over a specified period but at reduced or zero interest. Debt management plans typically run for four years but may go up to five.
Debt management plans are voluntary, so your creditors can choose whether to participate or not. Even if some creditors agree to be part of the plan, not all have to, meaning you could still owe interest on some debts.
Your creditors can also agree to stop taking action, such as sending your accounts to collections and garnishing your wages. However, they are not legally bound by this agreement; therefore, you will not be eligible for legal creditor protection.
Who Is A Debt Management Plan Ideal For?
A debt management plan is ideal for those:
- Whose total debt owed is relatively small (i.e., $10,000 to $15,000);
- Who owe to only a small number of creditors (i.e., two or three credit cards); and,
- Who are able to repay their debts in full but need a break on the interest.
This means you can pay off your debt faster without getting in more debt from growing interest. And applicants do not need to be insolvent to apply for a debt management plan.
How to Select Which Option Will Work for You
As previously mentioned, debt management plans typically run for four years but may go up to five. To estimate what your monthly payments could look like with a four-year plan, take the total amount of debt you owe and divide it by 48 (total number of months in four years). For a five-year plan, divide your total debt by 60.
If you can afford the estimated monthly payments, then a debt management plan could be a good option for you. But if you can’t afford to repay your debt or the estimated monthly payments, and you need legally-bound creditor protection, then consider opting for a consumer proposal.
With a consumer proposal, your bankruptcy trustee will aim to reduce your debt owing so you can have manageable monthly payments and get out of debt while having creditor protection.
When to Consult the Services of A Professional to Help
If you are in desperate need of debt relief and are tired of hearing from creditors and having your wages garnished, it’s time to get professional debt counselling help.
Depending on your financial situation, you might qualify for a consumer proposal to reduce your total debt owing and have more manageable monthly payments. To find out if you are insolvent and are eligible for a consumer proposal, contact a licensed insolvency trustee.
For help with your specific debt situation and more information on the debt management and the consumer proposal process in Ontario, contact your local professional debt counselling services in Ottawa.