What is debt settlement Canada?

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Settling debt in Canada involves negotiating with creditors to pay back less on unsecured debts like credit cards. It’s informal and not legally binding, so creditors might not agree. The benefits include reduced debt without severely impacting your credit score, but creditors could continue collection efforts.

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Debt Settlement Question

What is debt settlement Canada? I want to learn about debt settlement options available in Canada and how they differ from other debt relief methods.

From: Anonymous Question
Location: White Rock, British Columbia (BC)
Category: debt settlement

Debt Settlement Answer

Settling debt in Canada is like negotiating with your creditors to agree on paying back less than what you owe on unsecured debts like credit cards and personal loans. You can take this on by yourself or enlist the help of a debt settlement company. Unlike going the formal route of consumer proposals or declaring bankruptcy, debt settlement is a bit of a casual chat—it’s not legally enforced, so creditors don’t have to say yes to your offer. The upside? You might slash your debt and it usually doesn’t hit your credit score as hard as declaring bankruptcy. However, there’s a catch—creditors might keep knocking to collect if things don’t go your way.

From: Insider Adam

Office of the Superintendent of Bankruptcy (OSB) Answer

Debt settlement in Canada refers to the process where a debtor negotiates with creditors to pay a reduced amount to settle their debts. This is often done through a third-party debt settlement company or a similar service. The intention is to reach an agreement that is less than the total owed, allowing the debtor to reduce their financial burden.

Debt settlement differs from other debt relief methods such as consumer proposals, personal bankruptcy, debt management, and debt consolidation in several ways:

1. Consumer Proposal: A legally binding agreement under the Bankruptcy and Insolvency Act, where a debtor proposes to pay a portion of their debts over a specified period, typically up to five years (provided under the Bankruptcy and Insolvency Act, RSC 1985, c B-3).

2. Personal Bankruptcy: This involves a legal process that allows individuals to discharge most of their debts, subject to certain conditions and obligations, which can affect their credit rating and ability to obtain credit immediately afterward (governed by the Bankruptcy and Insolvency Act).

3. Debt Management: This is typically a non-legal agreement where a debtor works with a non-profit credit counseling agency to create a repayment plan that consolidates their debts into one monthly payment, but does not reduce the total amount owed.

4. Debt Consolidation: This involves taking out a new loan to pay off multiple existing debts, thereby simplifying payments but not necessarily reducing the overall debt amount.

Debt settlement tends to have a shorter duration and may lead to creditors reporting the settled amount to credit bureaus as “settled for less than owed,” which can impact credit scores. Additionally, it may not be a legally binding agreement like a consumer proposal or personal bankruptcy, leading to potential further collection actions if creditors do not agree to the settlement terms. Thus, while debt settlement may offer immediate relief, it has distinct implications compared to other options available in Canada under the Bankruptcy and Insolvency Act and related regulations.

From: OSB Helper

Related Questions to Creditors Negotiation

Here are the top 5 most frequently asked questions related to “What is debt settlement?” in the context of Canadian debt relief options:

1. How does debt settlement work?

Debt settlement involves negotiating with creditors to pay less than the full amount owed on unsecured debts, often through a lump sum payment or a series of payments managed by a debt settlement company or the debtor themselves[2][3][5].

2. What types of debts can be settled through debt settlement?

Debt settlement typically includes unsecured debts such as credit card debt, personal loans, and lines of credit, but excludes secured debts like mortgages or car loans, and government debts like taxes or student loans[1][3][5].

3. Is debt settlement legally binding?

No, debt settlement is not legally binding; it is an informal agreement between the debtor and the creditors, unlike a consumer proposal which is legally binding and regulated by the Bankruptcy and Insolvency Act[1][2][5].

4. How much of the debt can be reduced through debt settlement?

The amount of debt reduction through debt settlement can vary, but it typically ranges from 30% to 70% of the original balance owed, depending on several factors including the age of the debt and the proficiency of the negotiators[3][5].

5. What are the differences between debt settlement and a consumer proposal?

Debt settlement is an informal process with no legal protection, while a consumer proposal is a formal, legally binding process administered by a Licensed Insolvency Trustee, offering more legal protection, stopping interest charges, and halting collection actions[1][2][5].

If you have a question about debt see our debt questions or ask your own debt related question.

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