Debt settlement isn't for everyone, but here's how some can get out of hock

There are several catches that don’t make it as easy as it sounds

Article content

Settling your debts with your creditors has its pros and cons, and it isn’t a viable option for many clients, but that doesn’t mean they don’t have questions about it — they do.

To answer some of those questions and debunk a few common myths, here’s what you need to know about debt settlement.

Article content

A debt settlement offers your creditors a lump-sum payment for a portion of what you owe. After reviewing your situation and the likelihood of receiving full repayment from you, your creditors will determine whether to accept your settlement offer. If they do, the amount is confirmed in writing, and your creditors agree to write off the remaining balance. Even though it sounds simple enough, there are several catches that don’t make it as easy as it sounds.

Advertisement 2

Article content

To make a settlement offer, you must have the amount you’re offering available in cash before agreeing to the terms. This is where most settlements fail because if you had a pot of cash hidden in your closet, you likely wouldn’t be in debt in the first place.

But there are times when a lump sum becomes available to you. For example, you might receive a generous bonus or larger-than-normal commission cheque at work. If you receive an inheritance or sell a large asset, you may want to use the money to get back on track with your debts. There are also times when family steps up to help because they see how much you’re struggling financially and want to help.

You need to treat all your unsecured creditors fairly and equally when you offer them what you can afford to pay. This means you need to split the money you have by percentages and not ignore any of your debts. If one creditor holds 60 per cent of your unsecured debt, your offer to them needs to be 60 per cent of the money you have available.

Negotiating a debt settlement is time-consuming and stressful, and it’s not worth starting if you don’t already have money set aside and are ready to pay, but there are times when your creditors are very receptive to your offer.

Article content

Advertisement 3

Article content

Creditors will want details about how much you are offering to other creditors, where the money you have is coming from and why you believe they are better off accepting your settlement offer rather than waiting to get paid all the money they lent you.

This catches many people off guard, but debt doesn’t go on sale for 40 per cent off like jeans and jackets do at your favourite retailer. Your lenders have a right to know why you’re asking them to excuse you from paying back all the money you borrowed. If your situation warrants some relief, most creditors will entertain a reasonable settlement offer, but it will take some work to arrive at a final number that everyone can agree on.

You might be wondering what happens to the other 20 per cent if you pay 80 per cent of what you owe? Great question. Your creditors wipe that from the amount you legally owe them, but it will show up on your credit report for as long as six to seven years from the time the settlement payment was processed.

If a non-profit credit-counselling organization helps you settle your debts, the written-off portion will be reflected for two years, but if you pay your creditors yourself, it will be reflected for six to seven years, depending on which province you live in. Even though you’re trying to get a fresh start by dealing with what you owe, it will negatively impact your credit score, and the impact will be worse if you negotiate on your own versus getting help from a reputable non-profit agency.

Advertisement 4

Article content

In choosing someone to help with your settlement offer, be sure to ask how they get paid. You don’t want to deal with a consultant that charges you upfront fees with no guarantee that they’ll refund you every penny if the settlement isn’t successful.

You’ll also want to check with your province’s consumer protection office to verify a company’s or organization’s licensing before you turn over a lump sum of money. Search for reviews online to see how they treat their clients and don’t be afraid to take your time deciding whom to trust with your financial future.

Related Stories

Debt settlement can be the right option for someone to get out of debt, but there are many other debt- relief options and strategies, too. The trick is to find what will work best for your current situation, and which option will allow you to regain your financial footing quickly later.

For most Canadians, living without credit isn’t realistic. As you start building up a positive track record again — paying your bills on time and not borrowing more than you can afford to repay — the debt settlement and other negative information will become less important, and your credit rating will recover.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 26 years.

Article content


Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.


Related Articles