Debt Settlement plans in Canada
A debt settlement plan is offered by ‘for-profit’ companies who say they will negotiate an agreement between you and your creditors to settle your debt for less than you owe. It is not possible to include secured debt (e.g. car loans, mortgages) in a debt settlement, but unsecured debts — such credit cards, department store cards, payday loans or other loans — can be included.
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 you 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 debt 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 in one of the following ways:
- It will try to settle your debt for a reduced amount, one creditor at a time
- Once you have built up a lump sum payment that the company believes your various creditors will accept, it will contact and attempt to reach a separate agreement with each of your creditors
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 important to be aware that, when you stop making any payments to creditors, the debt is not settled until the debt management company completes its negotiations to that creditor, and 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 the pros and cons of each solution to help you decide the best for your situation.