If your debt load is crushing, it’s natural to want to find a debt relief solution. Before you accept a debt relief strategy, it’s essential to know what you want in order to make sure you’re getting the best option for your circumstances. Terms like debt forgiveness, debt discharge, and debt settlement are often used interchangeably, but they mean different things. Here, we’ll explore the meanings behind each term and show you how to choose what’s right for you.
Different Types of Debt Relief
Several options are available that may help you reduce your debt to make it more manageable. However, it’s essential to understand the type of debt forgiveness program you’re signing up for, as the outcomes may differ.
Debt forgiveness
Debt forgiveness, or debt release, is when the lender writes off some or all of your debts. A write-off means the lender eliminates all or part of the debt. You no longer have to repay the amount that’s written off. Debt release can be granted for:
- Compassionate reasons.
- A debt management plan.
- A debt settlement.
- A Consumer Proposal.
- Filing for Bankruptcy.
Only Consumer Proposals or Bankruptcy legally eliminate debt. Debt forgiveness for compassionate reasons, debt management plans and debts settlements are informal arrangements that creditors do not have to participate in. An informal arrangement allows your lenders to continue collection activity, garnish your wages, and proceed with legal action against you if they decide not to participate or if negotiations are ongoing.
Compassionate reasons
If you can’t pay your debts because of a change in your financial situation, you can send a hardship letter, also known as a write-off letter, to your creditors asking them to forgive you of some or all of the money you owe. A hardship letter is an informal request. Your lender’s participation is voluntary and they’re not obligated to consider or accept your request.
Your letter should state why you’re experiencing hardship. It can include reasons like medical issues that leave you unable to work or limited income due to retirement. These details will help your lender understand why you need debt forgiveness.
Including supporting documents, such as your monthly income, may strengthen your case. Debt release letter sample templates are available online to help you write a compelling letter. The lender may choose to forgive some or all of your debt.
Your debt forgiveness letter should include:
- Your name and address.
- Your lender’s name and business address.
- The account number and amount of the alleged debt.
- Specific reasons for your hardship, such as medical issues, a divorce, or reduced income.
- Exactly what you’re asking for-either a reduction of part or all of your debt.
- Any documentation that supports your request.
If the lender refuses to forgive your debt, other solutions for debt release may help.
Debt management plan (DMP)
Debt management plans are put in place by credit counsellors. Creditors aren’t required to participate in a debt management plan. You must repay the debts of creditors who don’t participate separately. Additionally, a DMP doesn’t protect you from lawsuits, wage garnishments, or collections if your creditors refuse to participate.
Debt settlement
A debt settlement is an agreement you negotiate with your creditors. Debt settlement companies will negotiate on your behalf for a fee. The idea is that you offer a lump sum to pay towards your debt that is less than the total that you owe. The creditor agrees to forgive the remaining balance in exchange for a lump-sum payment.
For this to work, your creditors must agree to participate. They are under no obligation to accept your offer.
If you hire a debt settlement company, they typically charge high fees up front with no guarantee of success. These are informal arrangements that your creditors must agree to in writing if they want to participate. Creditors can continue collection activity while the settlement is being negotiated.
Consumer Proposal
A Consumer Proposal, like Bankruptcy, is a government-approved, legally binding debt solution. To file a Consumer Proposal, you’ll need the services of a Licensed Insolvency Trustee (LIT). LITS are debt experts licensed by the federal government. The Office of the Superintendent of Bankruptcy oversees their work.
Your creditors can vote to accept the terms of the Proposal. In most cases, creditors do agree. If they don’t, your LIT may change the terms to get approval or offer different debt relief options.
The benefits of a Consumer Proposal are:
- It can reduce the amount you owe.
- You make one monthly payment to your LIT.
- Your monthly payment includes any fees.
- You can have up to five years to complete your payments, depending on how the Proposal is designed. Proposals can be paid in one lump sum, or over any period of time, up to five year.
- You keep your assets, the value of which is taken into account when designing the proposal (Consumer Proposals must pay the creditors more than they would recieve through a Bankruptcy)
- All collection activities stop as soon as the Proposal is filed
- You must attend two financial counselling sessions with your LIT.
- Your creditors get to vote on your Proposal. If the majority of them accept the proposal, it becomes binding on all of your unsecured creditors, whether they voted to accept it or not.
After you finish making all your payments, you’ll receive a Certificate of Full Performance. The letter is a type of debt discharge, meaning that the debts included in your Consumer Proposal are forgiven and you won’t have to repay them.
Bankruptcy
Filing for Bankruptcy is another option to solve financial problems. It’s a solution for debtors who are looking for faster solution to their debt issues. It costs less than a Consumer Proposal, but has other requirements that a Consumer Proposal does not. A LIT must file for Bankruptcy on your behalf.
When you file for Bankruptcy:
- All collection calls and legal action against you are stopped.
- If you own any non-exempt assets, you may need to give them up, depending on whether they have equity in them. This should be explored fully with the Trustee before making a decision to file a Bankruptcy.
- It takes nine months to complete a first Bankruptcy or, if you have surplus income according to government standards, 21 months
- If you have surplus income, 50% of the surplus is paid to the Trustee, for your creditors, over the period of the Bankruptcy.
- You must attend two financial counselling sessions with your LIT.
- You must submit monthly income and expense statements to the Trustee.
Like a Consumer Proposal, filing for Bankruptcy leads to a legal discharge of your eligible debts once you meet all Bankruptcy requirements, such as payments and counselling. Once everything is complete, your LIT will issue a Certificate of Discharge. You’ll have no legal obligation to repay the eligible debts included in your Bankruptcy filing after the discharge of your debts.
Not all debts are eligible for a debt release. Some debts that you can’t include in a Consumer Proposal or Bankruptcy are:
- Secured debts, like a mortgage or vehicle loan, if you are keeping an asset
- Court fines.
- Alimony or child support.
- Debts that are a result of fraud or misrepresentation
- Student loans that are less than 7 years old.
Debt release programs
While there are no government-backed debt forgiveness programs in Canada, filing a Consumer Proposal or a Bankruptcy is a trusted, legally approved option that can give you peace of mind.
When you’re looking for debt relief, it’s best to use a permanent solution that will:
- Eliminate your debt.
- Be legally binding on your creditors or collection companies. Only a Consumer Proposal or Bankruptcy is legally binding on your creditors.
- Offer a manageable payment plan.
- Ensure your creditors participate.
Where to Find Help With Debt Forgiveness
Several options are available to help you deal with your debt. Finding the best one for your circumstances will depend on what you want to accomplish. It’s important to remember that all debt relief solutions will impact your credit score, and most have some fees.
If you want expert advice tailored to your specific circumstances, book a free appointment with LCTaylor online or by calling 204-925-6400. Our team has been working with stressed borrowers in Manitoba for more than 30 years. We’ll work with you to find the best debt relief solution for your debt so you can get a fresh start.
Leigh C. Taylor, LIT
