Debt can often be the elephant in the room, and it’s an issue that many find uncomfortable to talk about. Particularly if you’ve amassed a mountain of debt and are faced with relentless collection calls.

For many, debt is a result of a life change. A divorce, death in the family, unemployment or ill health can derail even the most financially prepared.

The good news is you can take advantage of the many Canadian debt relief options available.

We’ll focus on the pros and cons of each debt relief program so you can determine the best option for you.

Signs of debt problems

If you’re struggling to repay your debts or make ends meet, don’t ignore the problem. If you are experiencing any of the following, you may need debt relief:

  • You’re unable to pay your bills on time.
  • You’ve missed some bill payments.
  • It’s a struggle to reduce your debt each month.
  • Collection agencies are calling you.
  • You’re experiencing wage garnishments.

Debt relief Canada: your options

Let’s take a closer look at the different debt relief options available in Canada.

Which one you choose depends on:

  • Your debt amount.
  • The type of debts.
  • Your income.
  • Your assets.
  • The urgency of your situation.

Debt consolidation loan

Debt consolidation combines your debts into one monthly repayment using a personal loan with a fixed interest rate. Instead of making multiple payments to different creditors, you make one payment towards the loan.

Pros and cons of debt consolidation

The main benefit of a debt consolidation loan is that the overall interest rate will be lower, reducing your payments. If you have high-interest debt like credit cards, the lower rate can help you pay your debt faster.

If you’re not defaulting on payments but want to get your debt under control, debt consolidation might help you get ahead.

Types of debt consolidation in Canada

Debt consolidation is a great option, but it isn’t for everyone because you must meet the qualifying criteria.

Lenders want to see that you can afford to repay the loan through a steady income and a good credit score. They may also ask you to provide collateral to secure the loan.

So if you have good credit and can meet your monthly loan payments, debt consolidation might be a good choice.

How much does a debt consolidation loan cost?

Traditional lenders such as banks and credit unions offer the best interest rates for debt consolidation loans, typically 7% – 12%.

Finance companies will charge at least 14% for secured loans and over 30% for unsecured loans. They may also charge some additional setup fees.

How long does debt consolidation take to complete?

A debt consolidation loan term typically lasts 1-5 years.

Does debt consolidation impact my credit score?

Consolidating your debts into a loan may lower your credit score at first.

A lender will perform a credit check, resulting in a hard inquiry on your credit report. This will lower your credit score by a few points.

When you open a new credit account, it lowers your average account age. So, once your loan is approved, your credit score will temporarily dip.

However, there are positives:

  • You’ll increase your credit utilization ratio, which should help your score.
  • If this is your first loan, you might get a credit score boost because you are using different types of credit.
  • By making loan payments on time, your credit score will improve.

A debt consolidation loan may hurt your credit right now, but make your payments on time, and your score will rise.

Debt settlement

Debt settlement involves using a debt settlement company to negotiate with your creditors on your behalf. You pay back a lump sum, often less than your total debt.

Creditors aren’t required to negotiate with a debt settlement company, and you will pay a fee.

Pros and cons of debt settlement

How much does debt settlement cost?

Even if your creditors accept your offer, a debt settlement company will charge an upfront fee.

How long does debt settlement take to complete?

The time it takes to complete debt settlement depends on the negotiations with your creditors.

Does debt settlement impact my credit score?

Debt settlement can hurt your credit score if you stop making payments while a debt settlement company negotiates with your creditors. If you miss any payments, this will damage your score.

Are debt settlement companies legitimate?

Many debt settlement companies pressure you into entering an agreement by making promises they cannot keep. These companies cannot guarantee that creditors will agree to a settlement.

They may promise a debt reduction or say they can stop a wage garnishment or legal action, but they don’t have the power to stop creditors from contacting you.

Beware of debt settlement scams in Canada

If you’re looking for creditor protection, only a Licensed Insolvency Trustee can do so through bankruptcy or a consumer proposal. Don’t use a debt settlement company to file a consumer proposal or bankruptcy.

Credit counselling

Credit counselling services are carried out by both for-profit and non-profit agencies that offer advice on resolving debt problems.

Your credit counsellor will conduct a financial assessment and offer guidance on debt, household spending and budgeting.

Next, they recommend a debt solution like a consolidation loan, home equity loan, consumer proposal, bankruptcy or a debt management plan.

Pros and cons of credit counselling

When working with a credit counselling agency, they may promote a debt management plan because the creditor will pay them a percentage of the debt recovered.

A debt management plan involves creating a repayment schedule that works for you and your creditors. You make a monthly payment to the credit counselling agency, which distributes the funds to your creditors.

It is worth noting that you cannot lower your debt in a debt management plan. Part of the credit counsellor’s role is to ensure you can fully repay your debts within the agreed period.

If you decide to go with credit counselling, choose a non-profit credit counselling agency. Use a reputable association like Credit Counselling Canada.

How much does credit counselling cost?

Although a credit counselling agency might reduce your interest, you will likely be charged a fee for their services.

Agencies may reduce or eliminate fees in some circumstances, but often there is an initial setup fee and a monthly fee. Some agencies receive a commission in a debt management plan, so they may push this solution over other options.

If you’re not careful, much of what you save in interest could go to pay fees. Calculate how much you’ll save after fees before you proceed.

How long does credit counselling take to complete?

Typically, you can complete the plan and pay off your debts within three years.

Does credit counselling affect my credit score?

If you enter a debt management plan, your credit score will decrease. Your credit report will show that you make regular payments through a debt management program or a credit counselling agency.

However, making payments on time and lowering your debt will help your credit in the long run.

Consumer proposal

A consumer proposal is a legally binding agreement between you and your creditors.

You repay your creditors a portion of your debts based on what your can afford, with the rest forgiven. This lets you pay back less and combine your debts into affordable monthly payments.

Pros and cons of a consumer proposal

There is no interest applied to your payments, and at the end of the proposal, you are debt free. Collection calls and wage garnishments will stop. You won’t lose your home, car or RRSP.

Collection calls, wage garnishments and legal action stop.

You can include unsecured debts in a proposal, including credit card debt, payday loans, tax debts and other lines of credit.

If you have an income and assets to protect, a consumer proposal can help you do this while avoiding bankruptcy.

It’s a government-approved debt relief program under Canada’s Bankruptcy and Insolvency Act and administered by professionals called Licensed Insolvency Trustees.

How much does a consumer proposal cost?

Consumer proposal costs depend on your debt level, household income, assets and whether you have any dependents. You will know the cost of the consumer proposal before you file, and the amount will never change.

Consumer proposal cost

The federal government regulates a trustee’s fees. These fees are paid from your consumer proposal at no additional cost to you.

How long does a consumer proposal take to complete?

You can make monthly payments towards a consumer proposal for up to five years, but you can pay it off as quickly as you are able to. You can pay a lump sum of money towards your proposal at any time to complete it early.

A consumer proposal can be spread over five years.

How does a consumer proposal affect my credit score?

A consumer proposal does affect your credit score, but dealing with debt will help your credit in the long term.

If you have missed payments or are being pursued by a collection agency, your credit score is already damaged. You’ll find that a consumer proposal doesn’t cause much further damage.

Each credit account will be given a 7 rating when you file your proposal. This tells lenders that you are making regular payments through this agreement.

A note will appear on the public records section of your credit report for at least three years.


Bankruptcy works by surrendering some of your assets to a Licensed Insolvency Trustee, which can be sold and distributed to your creditors.

When you file, collection calls, wage garnishments and any legal action will stop. Secured creditors can still take action if you are behind on payments. For example, a car loan company could seize the vehicle.

At the end of the bankruptcy period, your unsecured debts are discharged, and you are debt free.

Pros and cons of bankruptcy

For many, bankruptcy can be avoided by filing a consumer proposal instead. However, bankruptcy might be the best option if you have no income or assets.

Alongside a consumer proposal, bankruptcy is one of only two formal debt forgiveness solutions in Canada.

Two formal debt forgiveness programs in Canada: bankruptcy and a consumer proposal.

How much does bankruptcy cost?

If you proceed with bankruptcy, there will be a cost based on your income, assets, and family size. If you earn more than the income threshold, you will make additional payments, extending your bankruptcy.

How long does bankruptcy take to complete?

In most cases, a first-time bankruptcy takes nine months. But if you have surplus income, your bankruptcy could last up to 21 months.

How does bankruptcy affect my credit score?

When you file for bankruptcy, it appears on your credit report, and your credit accounts are given the worst credit rating possible, damaging your credit score.

Get debt relief in Canada today

Canadian debt relief options depend on your individual circumstances. No debt relief solution is an instant cure, and each has pros and cons.

If you’re struggling to make your debt repayments, take advantage of a free consultation with a Licensed Insolvency Trustee.

Licensed Insolvency Trustees can stop collection calls, lift wage garnishments, end all legal action and freeze interest on debts.

A Licensed Insolvency Trustee can provide debt advice and has the power to stop collection calls, wage garnishments and other legal action.

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