How to Get Out of Debt Canada
Can’t pay your bills? You’re not alone. Many Canadians reach this point at one time or another in their lives. In 2020 alone, over 96,000 Canadian consumers filed insolvency claims (bankruptcies or consumer proposals).
Thousands of consumers before you have experienced the following scenario: the bills get ahead of you and before long you are using lower-interest credit cards to pay off your higher-interest credit card debt, and borrowing from one account to pay off another. Then one day you realize: I’m in trouble and I need help getting out of debt!
In Canada, there are many practical ways to address the problem of excess credit card debt so that eventually you can become credit card debt free. The same is true if your debt is from student loans, personal loans or payday loans. If you make a good plan, possibly with the help of a volunteer credit counsellor or a professional such as a Licensed Insolvency Trustee, you’ll get out of debt faster and your credit report will improve.
Credit Card Debt Often Grows Out of Control
The great majority of consumers with debt problems have credit card debt. Credit cards are easy to get compared to other forms of credit and often have very high interest rates.
Although you may intend to pay off debt from your credit cards quite quickly, the accruing interest can make this harder than you imagined. Rest assured, this has happened to hundreds of thousands of Canadians!
Read on to learn how to improve your debt situation.
How Do I Get Out of Debt with No Money?
This is a key question. Even so, you’ve probably read many articles that fail to answer it. You may have very little money on hand, and you certainly do not want more debt. How can this be handled?
Naturally, if you had more money you would not have a debt problem! And yet, when you read about such solutions as consumer proposal and personal bankruptcy, there is always a mention of the fees. This can lead to the hopeless feeling that you are so insolvent you can’t even afford to “go bankrupt.” How could you manage this extra expense, when you can’t even make your minimum payments right now?
Let’s back up a minute, and gather more information.
The actual cost of some common debt solutions:
Credit Counselling: this is often free – in fact, be cautious of firms that require payment for counselling. In many provinces, not-for-profit organizations run very helpful credit counselling services.
Debt Consolidation Loans: these are free to set up with your bank or credit union if you qualify; your payments into the loan will be a lower monthly amount than your current combined minimum payments on your bills.
Orderly Payment of Debts (OPD) (in provinces and territories where it is available): free to set up with the help of a credit counsellor or Trustee; the result will be one low monthly payment towards your debts.
Consumer Proposal: similar to debt consolidation loans and Orderly Payment of Debts, this solution will result in a schedule of regular payments (usually monthly) that addresses all your unsecured debts. A government-regulated fee paid to your Trustee or Administrator is rolled into your regular payment.
Bankruptcy: A first-time bankruptcy, which may take as little as nine months to complete, costs $1,800. However, you do not have to pay this “up front.” Typically, it is divided into nine monthly payments of $200. Keep in mind that at this point you will no longer be making payments towards your debts. If your income is over a certain monthly level your bankruptcy may last longer and you will make “surplus income” payments.
The Special Case of Student Loans
In Canada, special rules govern student loans when it comes to debt solutions. If your student loan is recent, you may not be able to discharge it through consumer proposal or bankruptcy, although credit counselling or a debt consolidation loan may be very helpful to you.
If better budgeting is not enough to ease your situation and you are having difficulty making your student loan payments (and possibly other payments), you may consider filing a consumer proposal, or filing for bankruptcy. But unlike the other debts that can be discharged with these insolvency solutions, student loans are subject to restrictions related to how long ago you received the loan, and when you left school. 
In simple terms, if you file for bankruptcy or file a consumer proposal seven years or more after you finished full or part-time studies, the debt can be discharged along with your other unsecured debts. However, definitions can be tricky, especially in the matter of determining the date that you ceased to be a student. This date can vary depending on the Federal or Provincial legislation that applies to your student loan.
Also, in special cases, you may successfully apply for a hardship provision, under which you can include student loan debt in your consumer proposal or bankruptcy only five years after you left your studies.
The best professional to guide you through these definitions concerning student loans is a Licensed Insolvency Trustee. The Trustee can advise you on the best solution to your overall debt situation, including your student loan.
Your Options for Getting out of Debt in Canada
The good news is that there are several very good options available to you. These options have been used by millions of Canadians, and they work.
Note: secured vs. unsecured debt
Three solutions described below – Orderly Payment of Debts, Consumer Proposal, and Bankruptcy – are designed to discharge only unsecured debts. Examples of unsecured debts include most credit cards, payday loans, and most student loans. These debts are not secured by collateral which a creditor can use to recover their funds in the event you default on the debt.
In contrast, secured debts involve collateral, to protect the creditor. Examples are house mortgages, home equity lines of credit (HELOCs) and most auto financing. These debts are typically not discharged by the insolvency solutions listed here. For instance, many homeowners simply carry on with their home mortgage payments while they pay off their consumer proposal. A Licensed Insolvency Trustee can explain how these differences influence your specific debt situation.
Because these debt solutions do not necessarily discharge secured debts, we do not speak of being debt free following their completion.
Learn better money management
Create a budget by listing all your monthly income and expenses. Analyze it to see if you can raise your income or lower your expenses. You might be surprised that when you put your income and expenses down in a list, you immediately see ways to economize without greatly impacting your lifestyle.
Realize that a lot of what you are buying may not be necessary. Don’t waste your money by giving in to impulse buying.
Once you have reduced your expenses, use the cash you have freed up to repay your debts. Get rid of most of your credit cards as soon as you can pay them off, so the temptation is removed. Keep a couple of credit cards and rebuild your credit rating by using them responsibly. This way, you’ll be able to get necessary credit more easily and at lower interest rates.
You can get free help with budgeting and other money management skills from a reputable credit counsellor.
Get a bank loan for debt consolidation
If you qualify for a debt consolidation loan, you can use it to replace your unsecured debts with a single debt – with one monthly payment, a lower interest rate, and possibly a longer payment period.
If, like most people, much of your unsecured debt is in high-interest credit cards, the lower interest of the debt consolidation loan will make it much easier to get back in the black.
In some cases, your bank will deny your application for such a loan. This may happen if your credit score has already been damaged by late monthly payments, or if the bank or credit union does not feel you have enough monthly income to manage the loan payments.
Construct a debt management plan with the help of a credit counsellor
A credit counsellor can help you build money management skills. Also, he or she may negotiate with your creditors to set up a debt management plan for you. A typical plan has a single monthly payment and lower interest costs, and is spread over up to four years.
The counsellor may help you set up a monthly budget, which will help make you aware of how much money you need to “make ends meet,” and what you can afford to spend on luxuries or optional items. Often, a small adjustment to your spending habits can make a great difference to your personal finance situation.
In many provinces, non-profit credit counselling organizations exist that provide significant help to those with too much debt.
Orderly Payment of Debts (in Alberta, Saskatchewan, PEI and Nova Scotia)
If you qualify to enter an Orderly Payment of Debts program, an arrangement will be made with your creditors so that you can make a single monthly payment geared to what you can afford. The Program provides lower interest costs, protection from legal actions, and extensive help to learn financial skills.
Although governed by Federal legislation, the program is only available in a selection of provinces and territories: most recently, Alberta, Saskatchewan, PEI and Nova Scotia.
Consumer proposal – negotiate a payment plan with your creditors
A Licensed Insolvency Trustee can help you file a consumer proposal to your creditors, in which you make set payments you can afford for up to five years. These payments cover the amount paid to your creditors and the government-legislated Trustee fees. Consumer proposal is a practical bankruptcy alternative if you have more debts than you can handle but earn a stable income.
In most consumer proposals you pay only a portion of what you originally owed to your creditors, but they receive more than what they would receive if you filed for bankruptcy.
The Licensed Insolvency Trustee will meet with you to determine if a consumer proposal is right for you. The Trustee is fully qualified to describe other debt solutions as well. There will be no pressure on you to choose a certain course, but you will gain valuable information.
If you choose to file a consumer proposal, the Licensed Insolvency Trustee will work with you to determine your monthly income and expenses, and the value of your assets. All this information is important in filing a proposal that is fair to both you and your creditors, and will be accepted by your creditors. You typically will not lose your assets in a consumer proposal – that’s one of its advantages as opposed to filing for bankruptcy.
As soon as the consumer proposal is filed, a legal “Stay of Proceedings” applies to your debts – this means that your creditors are prevented from taking you to court or garnishing your wages. In fact, they may no longer legally contact you by phone, email or mail. From the time your consumer proposal is filed with the government, your creditors will deal directly with your Trustee.
Creditors have 45 days to accept your proposal – and most proposals are accepted. Once accepted, a proposal is legally binding on all your creditors.
In most consumer proposals you pay no further interest on your debts, and you may pay less than the full amount owing, depending on your resources.
Why do creditors accept most consumer proposals? Creditors would rather accept a deal in which they get some amount of money, rather than risking that you will file for personal bankruptcy, in which case they will receive little or nothing.
A consumer proposal can be better than bankruptcy for you, too. You usually get to keep your house and other assets.
The immediate effect on your credit score of filing a consumer proposal is similar to that of filing for bankruptcy – your score on your credit cards will move to an R7 or an R9 (typically the score moves to an R9 in both cases). However, keep in mind that if you have become insolvent, you may already have missed payments – so your credit rating may not have been good for some time.
At the end of the proposal period (typically five years), or once you have paid the full amount of the proposal (yes – you are allowed to pay it off early if your circumstances improve) your unsecured debts are discharged. Your creditors cannot legally ever approach you again for payment on these accounts.
File for personal bankruptcy – get a fresh start
Bankruptcy in Canada is a useful insolvency solution for situations that the other options cannot address. If you cannot pay even a significant fraction of what you owe, you can file for bankruptcy through a Licensed Insolvency Trustee. Bankruptcy is stressful, but represents a new financial start.
An advantage of a simple bankruptcy versus a consumer proposal is that the bankruptcy may last as little as nine months, versus a typical five years for a consumer proposal (although consumer proposals may be paid off early). If you earn income over a certain amount (“surplus income”), your bankruptcy may be longer – typically 21 months. For more information, see our page How Long Will I Be in Bankruptcy?
What About My Credit Score?
Some individuals worry that they will never be able to own a house if they have been bankrupt or filed a consumer proposal, but this is far from the truth. However, rebuilding your credit rating after bankruptcy or consumer proposal is an essential step before you will be granted credit again at a favourable rate.
After you are discharged from bankruptcy, or have received your Certificate of Completion for your consumer proposal, it is a good idea to let the credit bureaus (Equifax and TransUnion) know. Both credit bureaus will allow you to send them a copy of your documentation. However, even if you do not contact them, they will soon learn of your completion and will update their files.
Your credit score right after consumer proposal or bankruptcy is likely to be quite low – often in the high 400s.
Apply as soon as you can for a small amount of credit to start you on your way to a better credit rating. This may take the form of a secured credit card, a loan from your bank, or even a car loan. Make sure to maintain a perfect payment record on this new credit, and don’t use more of it than you can easily handle. Soon, your credit score will begin to rise!
The record of your bankruptcy or consumer proposal will eventually be erased from your credit report. See our page, When Does A Bankruptcy Clear from My Credit Report for more information.
What If I Just Stop Paying?
You may feel so overwhelmed that you simply stop paying your bills, and attempt to carry on this way. In this case, you will find yourself avoiding answering the phone, not opening your bills, and possibly feeling guilty. Of course, you know that avoiding your creditors will only make matters worse. You may be hoping for a windfall that stubbornly doesn’t arrive.
Here’s what happens if you stop paying:
- One payment missed: If you have a good borrowing history, your creditors may simply send you a polite reminder letter.
- Two payments missed: You will get a strongly worded letter, and possibly also a phone call, demanding payment.
- Three payments missed: Creditors may begin enlisting collection agencies to press you for payment. Collection agencies will make your life unpleasant, using a variety of pressure tactics to get the money.
If you still don’t pay, stronger (but still legal) methods can be used, and the creditor or collection agency may take legal action against you. This can lead to wage garnishments or liens against property.
If your creditor is the Canada Revenue Agency (CRA), note that the CRA can proceed with liens or garnishments without having to take you to court first.
Your best bet to make things better is to act immediately. You may have more options than you think!
Free consultation with a Licensed Insolvency Trustee
If you need some direction and advice on your options on how to get out of debt in Canada, we encourage you to contact a Licensed Insolvency Trustee. Licensed Insolvency Trustees offer free and confidential initial consultations and can help you in choosing the option that is right for you.
What to expect when you meet with a Licensed Insolvency Trustee
Licensed Insolvency Trustees are professionals licensed by the Federal government to deal with insolvency situations. They are the only professionals who can file your bankruptcy or consumer proposal paperwork with the government.
Licensed Insolvency Trustees undergo rigorous training, and many are also Accountants. They have a solid understanding of both the causes and solutions for insolvency.
When you meet with a Licensed Insolvency Trustee, you’ll find a professional who is not judgemental of your situation – they know that you did not intend to have debt problems! The Trustee is also aware that many companies and institutions that offer credit do so knowing that many of their customers will have trouble making their minimum payments. You are not alone! Your Trustee will understand.
In your first meeting, you will give the details of your situation to the Trustee, and you may also provide exact numbers if you have them on hand. The Trustee will also ask questions about your job and your monthly expenses.
With this information, the Trustee can explain options for moving into a better financial future. These may include some that we have described above: credit counselling, consumer proposal, perhaps personal bankruptcy. The Trustee can explain the pros and cons of each, and how they apply to your unique situation.
At the end of your first meeting, you can both decide whether to proceed with any one of these options. There is no obligation, but one guarantee: you will finish your free, first meeting with much more information than you had before.