What you should know
Whether you’re deep in the red or behind on a payment or two, being in debt is no fun. And coming up with a plan for reducing your debt can feel overwhelming.
But you have options for getting out of debt. They include things you can do yourself, such as making a budget or negotiating with your creditors. We’ll walk you through them shortly.
As well, there are professionals who can help you get out of debt. (There are also shady players offering “debt relief services” to be aware of. More on those in a moment.)
Credit counsellors help people manage their finances and reduce their debt. They can help you improve your financial habits and create a plan to repay your debts. Many work for non-profit agencies, where their services are free or low-cost.
A credit counsellor can help you make a budget. This helps you understand how much you can afford to put towards your monthly debt payments.
They can also help you improve your financial skills. They can teach you how to avoid going into debt in the future.
As well, credit counsellors can help you put together a debt repayment plan. This involves lumping together all your debt payments into one monthly payment. You pay that amount to the credit counselling agency. The credit counsellor then pays your creditors.
To make the plan, the credit counsellor will call your creditors on your behalf and propose a payment schedule.
Under the law, anyone who represents you in negotiations with your creditors must be licensed as a debt repayment agent. This includes credit counsellors.
You can check with Consumer Protection BC to make sure anyone you hire to negotiate with your creditors has a licence to be a debt repayment agent. Their website features a licence search.
You may come across companies offering “debt relief services.” Be careful. Often, they’re trying to scam you.
Some “guarantee” they can negotiate a deal with your creditors. But a guarantee isn’t possible. Your creditors might turn down a settlement proposal. And you’ll be left on the hook for the fee for the “debt relief service.”
Some companies offer a loan to allow you to repay your debts until they can “negotiate a better deal with your creditors.” But these loans can come with fees, set-up costs, and high interest rates.
Some companies claim they can “fix” or “repair” your credit score. But the steps they can take you can do yourself, at no cost (for example, fix information on your credit report that is inaccurate or dated).
One more note on people who can help. A licensed insolvency trustee provides advice to people on getting out of debt. They’re professionals regulated by the government office that oversees bankruptcies.
An insolvency trustee can help you decide on a strategy to get out of debt. If you decide to make a consumer proposal or declare bankruptcy (explained shortly), you must hire a licensed insolvency trustee.
The federal government’s website includes a way to search for an insolvency trustee in your area. Find a licensed insolvency trustee.
Work out the problem
Option 1. Budgeting out of debt
To tackle your debts, you need to understand your financial situation. Your first step should be to list your assets (what you own) and debts (what you owe).
Then you should make a budget. A budget is a plan for how you will spend money over a period of time (one month, for example). It shows how much you expect to get and spend over that period.
First, list your monthly income. This includes income from your job, pensions, or other sources.
Next, list your expenses. Some common monthly expenses are:
- mortgage payment or rent
- phone bill
- utility bill
Compare your totals for income and expenses. If you’re spending more than what’s coming in, try to cut back on any non-essential spending. For each expense, ask yourself: do I want this, or do I need it?
We provide more detailed guidance on making a budget. See budgeting out of debt.
Option 2. Negotiate with your creditors
First, a caution. Have more than two years passed since you made a payment on a debt or the creditor demanded payment? If so, the creditor may have lost their legal right to enforce the debt. You should seek legal advice before contacting the creditor. See options for legal help.
If you’re having trouble making payments, consider contacting your creditors. Show them the budget you’ve prepared. Make them an offer based on what you can afford. Your creditors may agree to change the terms of your agreement to help you pay.
We offer step-by-step guidance on negotiating with your creditors. See negotiating payment terms.
Option 3. Consolidate your debts
Consolidating your debts means combining them into a single payment. There are three main ways to do this:
- a consolidation loan
- a line of credit
- a debt repayment plan
A consolidation loan is a single, new loan used to pay off multiple debts. Usually, the interest rate (and monthly payment) is lower than when paying multiple debts.
Opening a line of credit for the amount you owe is another way to consolidate your debts. You use the funds in the line of credit to pay off your debts. Usually, the interest rate on a line of credit is lower than when paying multiple debts.
With a debt repayment plan, you set up an account with a credit counselling agency. You deposit a monthly amount into the account. The credit counsellor uses this amount to pay your creditors until your debt is erased.
We walk you through each of these options in more detail. See consolidating your debts.
Option 4. Negotiate a debt settlement
With a debt settlement, you pay your creditors a lump sum that is less than the full value of what you currently owe. This can range between 20% and 80% of the debt currently owed. (Settlements at the low end of this range are very rare.)
A debt settlement only works if you have a good reason why you can’t pay the full amount you owe. For example, maybe you lost your job, or have a serious health problem.
You’ll have to persuade your creditors it’s in their interests to accept your lower offer, rather than a smaller amount or nothing at all (if you go bankrupt).
You can get help with negotiating a debt settlement. Non-profit credit counselling agencies offer these services. (So do for-profit companies, some of which don’t have your best interests at heart. So be careful.)
We have in-depth information on debt settlements. See negotiating a debt settlement.
Option 5. Make a consumer proposal
A consumer proposal is an offer you make to your creditors to settle your debts. If they accept your proposal, you pay them a portion of what you owe and they forgive the rest.
It’s a formal, legally binding process overseen by a licensed insolvency trustee. It can take up to five years. Some of your assets may need to be sold. We explain the process in detail. See making a consumer proposal.
Option 6. Declare bankruptcy
Bankruptcy is a legal process where you give up most of your assets to get rid of your debts. Going bankrupt is a long process with serious consequences. It’s the most drastic option for getting out of debt.
A licensed insolvency trustee must file an application for you with a government office. The trustee guides you through the process. They sell your assets (except for a few that are exempt) to pay off your creditors. When the process is complete, you’re “discharged” from bankruptcy. We walk you through declaring bankruptcy.
Who can help
These agencies may be able to help in your efforts to get out of debt.
Credit Counselling Society of BC
Consumer Protection BC
Office of the Superintendent of Bankruptcy
Canadian Association of Insolvency and Restructuring Professionals
Getting legal advice can help you decide on your next step.
Lawyer Referral Service
Access Pro Bono's Free Legal Advice
People’s Law School
Dial-A-Law has more information on Getting out of debt in the section on Money & debt.