Everything You Need to Know About Debt Settlement

Everything You Need to Know About Debt Settlement

There may come a time when a person realizes they owe more debt than they can afford to pay back. In this case, they may look to settle their debt, meaning they make a deal to pay creditors less than what is owed. There are a number of reasons creditors might agree to this, including:

  • The debt has been sold (usually at a steep discount) to a third party who is more willing to negotiate.
  • The creditor has already written off your debt after attempts to collect failed, so any collection is like a windfall.
  • They know they have few options to force payment, either because the debt is past the statute of limitations period or there are no assets or income they can seize.
  • They're facing a cash crunch, so they’d rather have some funds now than potentially more funds later.
  • They sense that you are insolvent and would rather negotiate with you than have you file a bankruptcy.

Types Of Debt Settlement

This doesn't mean it's easy to negotiate a reduction of your debt. There are several methods of debt settlement, each with their own pros and cons, which you should consider before you decide on a debt settlement plan. The 3 main types of debt settlement are:

  1. Informal proposal, where you personally contact each of your creditors and negotiate a deal with them on your own.
  2. Using a Debt Settlement company (which sometimes refer to themselves by other names such as a “debt consultant”) to negotiate with your creditors on your behalf.
  3. File a Consumer Proposal, wherein a Licensed Insolvency Trustee submits one formal proposal to all of your unsecured creditors on your behalf. 

How Do These Options Compare?

Here are the pros and cons of each of the main types of debt settlement:

Informal proposal

Pros Cons
Best for a very small number of creditors, each motivated to negotiate Creditors will usually only consider a reduction of your debt if you make the partial payment immediately in a lump sum
Can make different deals with each creditor, including possibly negotiating relief on behalf of a co-debtor or co-signor Can be tricky to manage negotiations with multiple creditors and keep your total payment manageable
Cost-effective, if you can avoid paying a professional such as a lawyer to help you

Can be very time-consuming

Negotiating is uncomfortable and requires some skill

Need to make sure you understand exactly what you're agreeing to, and get it in writing to avoid problems down the road

Private process, so others unlikely to find out about it Might not be able to reach an agreement with all of your creditors if they refuse to negotiate or have unreasonable expectations. Some, like tax collectors, have organizational policies against informally settling debts
It May have a lesser impact on your credit rating than other options (depends on various factors, such as how the creditor reports it, what other debts you have, how much you settled for, etc.)

Will show up as a negative item on your credit report, unless you creditors report it as a full payment based on the original agreement

You could unintentionally make things worse for yourself if you don't understand the legal implications (such as impact on statute of limitations) of statements you make to your creditors or making a partial payment


Debt Settlement Company

Pros Cons

Saves time and allows you to avoid uncomfortable conversations

Puts the negotiations in the hands of someone who may be more skilled or experienced at negotiating with creditors

Might not get a better deal than you could have negotiated on your own.

Creditors aren’t required to negotiate with them.

May end up paying more money overall when their fees are considered

Spouse or another person who owes the debt jointly, or has co-signed the debt, will be left to pay the unpaid portion

A good debt settlement company will review your situation and the various options before charging you any fees to make sure debt settlement is a good option for you

Complaints have been registered about the practices of some in the debt settlement industry, including high pressure sales tactics, unrealistic or false promises, high or hidden fees and even scams 

Due to lack of strict regulation, onus is on you to ensure you're working with a reputable company, read contracts carefully, and confirm they are doing what they say they will do. For more information, see the Government of Canada’s website

Private process, so others unlikely to find out about it Debt settlement companies will often refer you to a Licensed Insolvency Trustee (LIT) for a Consumer Proposal, after charging you a fee which you could have avoided paying if you had directly approached a LIT in the first place
It may have a lesser impact on your credit rating than other options (depends on various factors, such as how the creditor reports it, what other debts you have, how much you settled for, etc.) Will show up as a negative item on your credit report, and in some cases working with a debt settlement company can make it worse if creditors report a default due to stopping debt payments while negotiations are ongoing


Consumer Proposal

Pros Cons

Creditors unwilling to negotiate previously or only willing to consider a lump sum settlement will usually consider a Consumer Proposal, even with payment over up to 5 years, often for less than they would consider under other methods. Can even include tax debt and in some cases student loans, which typically cannot be settled otherwise

Creditors who don’t like the proposal have to accept the settlement if the majority of other creditors vote in favour of it

Must include all of your unsecured creditors in the proposal and, unless there's a legal reason otherwise, have to offer the same deal to everyone, even family and friends

Spouse or another person who owes the debt jointly, or has co-signed the debt, will be left to pay the unpaid portion

Legal “stay of proceedings” is automatically in effect upon filing, so your creditors can’t charge more fees or interest, take you to court, seize assets, or even call you. They can only deal with the Trustee

Formal process requires creditors to vote on the Proposal within 45 days, so you won't have to wait a long time to find out it if it's successful. And once approved, it's a legally binding contract

Bad for your credit score, sometimes as negative an impact as a bankruptcy. (Although may not make your credit score worse than it already is, depending on your situation.) Lenders usually won't extend credit until after proposal is completed

Trustee handles paperwork, communication with creditors, and filing documents. They'll calculate what the creditor would get in a bankruptcy, so creditors can see how much better off they are accepting the proposal

Before you file, the Trustee is required to review your situation and options to make sure the Consumer Proposal is your best option. If you decide not to file, typically no fees will be charged

Licensed Insolvency Trustees are a safe option for getting advice as they are highly trained, licensed, regulated and overseen by the government, and subject to a legal code of ethics 

Legal settlement, available only to insolvent individuals, in accordance with rules set by federal law under the Bankruptcy and Insolvency Act

Filed with the government and is a matter of public record. If someone is willing to pay a search fee, they can find out you have filed 


Which Option Is Right For Me?

As you can see, there are a number of factors to consider before taking on a debt settlement plan. The best and fastest way to find out if debt settlement is right for you, and which option will work best in your situation, is to visit a Licensed Insolvency Trustee who will review your situation and discuss options with you. If you choose to take on an informal proposal to your creditors or work with a debt settlement company, make sure you do your homework first to ensure you will actually be able to fix your debt problems.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals navigate their options for dealing with overwhelming debt. If you would like a free, no-commitment consultation to review your options, contact us.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

Frequently Asked Questions

In some cases, particularly where the debt is large, you may benefit from consulting a lawyer for assistance with negtiating a deal with your creditors. If you need help finding a good lawyer, a Licensed Insolvency Trustee can typically make a referral to a lawyer experienced in debt issues. If you can’t afford a lawyer, you may be able to find free legal resources in your community.

A credit counsellor may be willing to assist you, for a fee. However, make sure you do your homework before you sign anything or pay a credit counsellor. Some credit counsellors are essentially debt settlement companies, with the same potential pitfalls discussed in Everything You Need to Know About Debt Settlement. And like debt settlement companies, they are not well regulated so you need to do your own research to make sure they are legitimate and have ethical practices.

Another option is to contact a Licensed Insolvency Trustee for a free consultation. Licensed Insolvency Trustees will educate you about your options and may be able to give you some guidance on negotiating with your creditors.

Other options include finding a way to afford your debt payments like budgeting and cutting expenses, negotiating a lower interest rate informally or through a debt management plan, the Orderly Payment of Debts program, or debt consolidation. Alternatively, you may need the comprehensive relief from debt provided by Bankruptcy. See Everything You Need to Know About Debt Settlement for an in depth discussion.

Be careful where you get your information about your options. Inaccurate and biased information is abundant, particularly on the web. A good, reliable resource to check out is the Government of Canada’s website. Licensed Insolvency Trustees are also a reliable resource, as they are specifically educated in this area and are licensed and regulated by the government.

Sometimes it helps to know how much your creditors would get in a bankruptcy, as this can help you figure out what a fair settlement with your creditors looks like. The amount your creditors could expect to receive if you made a bankruptcy filing is very much dependent on your situation.

A Licensed Insolvency Trustee will review your assets, debts, income, and family situation, while considering the applicable provincial laws about exempt assets, in order to determine what impact bankruptcy would have on your creditors. Be careful taking advice from anyone else about bankruptcy – only a Licensed Insolvency Trustee can provide bankruptcy filing services, so they have the training and experience to provide information you can rely on. 

For more details on the features and benefits of Bankruptcy, visit this page or contact us.

The cost of a debt consolidation loan is not just about the monthly payment. You will pay interest on your debt, and you may also be charged fees upfront or while you are paying it off. The total cost of your debt consolidation loan is the overall amount you will pay by the time it is finished.

If you are offered a specified payment timeline with specified monthly payments, you can simply multiply your monthly payment by the number of months included in the timeline (and add any upfront fees you have to pay).

However, in some cases, you will have only a minimum monthly payment and you can decide how much to pay each month (such as in the case of a line of credit or a credit card you’ve used to pay your other balances). And often in these cases, your interest rate can fluctuate, either due to fluctuations in the prime rate or because an introductory interest rate expires. In this case, it is much harder to estimate how much it will cost you, and the amount you will pay overall depends on how much you choose to pay each month. If this is your situation unless you have some good spreadsheet skills you may need some help, such as contacting a Licensed Insolvency Trustee, to figure it out.

For illustrative purposes, I'll provide a few examples of the costs of a consolidation loan which show that the cost can vary substantially with different consolidation loans. These examples will be based on the assumption your consolidation loan amount is $25,000 and you can afford to pay up to $600/month. 

Consolidation loan with $500 in up-front fees and an interest rate of 25% and a payment timeline of 10 years. 

  • Your monthly payment would be approx. $580
  • By the end of the 10 years, you would have paid close to $70,000, including the initial fee and nearly $44,000 in interest

Line of credit with no upfront fees and an interest rate based on the prime rate which happens to be 5% at the time you take it out (a very good deal - you must have a very good credit rating and a good relationship with the bank). Let’s assume the prime rate goes up by 0.25% each year, and therefore so does your interest rate.

  • Your minimum monthly payment would start out at approximately $104, which pays only the interest.
  • You choose to pay $600 per month, so it will take you almost 4 years to pay it off and you will have paid nearly $28,000, which means you will have paid nearly $3,000 in interest on top of the original loan
  • Note: If you only ever pay the minimum monthly fee (ie. the interest), you will never pay the debt off. Over the course of 20 years you will pay more than $30,000, and you will still owe the original $25,000

Credit card with an introductory 0% interest rate. It charges a 3% fee for balance transfers, and the interest rate increases to 20% after 12 months. There is also a $50 annual fee.

  • The 3% balance transfer fee will amount to $750.
  • If you pay $600/month starting right away, you will pay it off within nearly 5 years and you will have paid nearly $34,000, including the transfer fee, annual fees and nearly $8,000 in interest. Note: If you pay only $100/month for the first 12 months, then increase it to $600 when the introductory period is over, it will take you nearly 7 years to pay it off and you will have paid approx $43,000, including the transfer fee, annual fees, and over $17,000 in interest.

No, you do not need to contact a credit counsellor or debt consultant to be able to meet with a Licensed Insolvency Trustee (LIT). You can contact any LIT directly and ask to set up a free consultation. It is not necessary to have a third party assist you with dealing with the LIT. LITs will work with you directly to gather information, determine your best option, and prepare the paperwork. When giving you advice on your options, an LIT will be considering your best interests. As explained in Who Does A Licensed Insolvency Trustee Work For?, an LIT does not work for your creditors despite what some may say.

For a more detailed explanation about why you do not need to contact a debt consultant, see our blog post Do I Need to Hire a Debt Consultant?

Reach out to us. You can make an inquiry directly from our website by clicking here, or you can call or text us at 1-403-899-3890. We will respond quickly, and work with you to find a good time for the meeting.

Licensed Insolvency Trustees (or LITs) are the only people who can provide bankruptcy or Consumer Proposals as an option for dealing with your debt. They are uniquely qualified to provide these services and give you advice about your debt. For more information, see our blog post: What is a Licensed Insolvency Trustee?

No, a Licensed Insolvency Trustee is an impartial facilitator who communicates with all parties to make sure the process is transparent, and that everyone is following the required rules so that the process is orderly and predictable.


With our experience and our caring approach, we will help you find the best option for debt relief based on your unique situation - from advice on talking to your creditors to a consumer proposal or bankruptcy, and everything in between. We are here to lift the burden caused by overwhelming debt. 

Contact us today at 1-403-899-3890‌ for a FREE, no-commitment meeting, and let us guide you to regaining your financial footing.

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