'Debt Settlement' plans in Canada
A debt settlement plan is offered by companies who advertise they will negotiate an agreement between you and your creditors to settle your debt for less than you owe.
Debt settlement process
The process begins when you enter into a contract with a debt settlement company. You will be instructed to stop making any interest or principal payments directly to your creditors and, instead, begin to make monthly payments to the debt settlement company to build up a lump sum payment in a holding account.
The debt settlement company typically does not contact your creditors to negotiate your settlement until you have built up enough funds in the holding account to cover its fees and to start negotiations with creditors. This usually takes several months of payments. Once the debt settlement company feels there is enough money to start negotiations, it will attempt to negotiate your debt with each of your creditors separately.
If any of your creditors refuse the suggested settlement plan, your debt with that creditor would then be excluded from the plan and you will still owe that creditor the full amount of your debt, including accrued interest.
Debt settlement - Things to be aware of
It is not possible to include secured debt (e.g. car loans, mortgages) in a debt settlement.
Although you may stop making payments to creditors, the debts isare not settled until the company completes its negotiations with each creditor. Interest charges will continue to accumulate on your debts. This means any of your creditors can still take legal action by starting lawsuits, seizing assets or
garnishing your wages, and
collection agencies can still make harassing phone calls. Debt settlement companies have no legal ability to stop them.
All debt settlement companies receive fees or payment for their services. With some, the initial monthly payment you make goes directly to them as “administrative fees”. Other companies request a lump sum fee upfront, or a few take a percentage of each of your monthly payments. Fees vary from province to province, but average fee totals range from $1,500 to over $3,000, depending on your debt level.
If you are considering using a debt settlement plan check out our comparison of debt settlement options and we encourage you to contact a BDO trustee near you for a confidential, no-obligation consultation.We'll outline the pros and cons of each solution to help you decide the best for your situation.