Comparing Canadian Debt Solutions

Identifying the best credit card debt solution to fit your unique financial situation.

If traditional monthly payments are not working to pay off your debt, it may be time to consider alternative debt solutions. There is a range of solutions that can make it faster, easier, and more affordable to get out of debt. This guide can help you identify the best debt solution to use in your financial situation. Let’s look closely at each debt solution and how they work.

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How to Find the Right Debt Solution for You

There are five ways to solve challenges with credit card debt in Canada. This video explains what they are and what you can expect with each. How do you know which solution is best for your unique financial situation? You should talk to a trained credit counsellor.

5 ways to solve debt problems in Canada

Canadians have five basic debt solutions that they can use to get out of debt. There are additional options available to homeowners that we will discuss later in this guide. But first, let’s look at the solutions available to anyone who needs help paying off debt.

Debt Consolidation

Debt consolidation works by combining multiple debts into a single monthly payment at the lowest interest rate possible. This does a few things to help you:

  1. It simplifies your bill payment calendar, so you’re not juggling multiple bills.
  2. By minimizing interest charges, you can focus on repaying the debt you owe.
  3. Lower interest can also help you get out of debt faster, even though you may pay less each month.

The most common way to consolidate debt is with an unsecured personal loan. You qualify for a loan based on your credit score. Then you use the funds you receive to pay off your credit cards and other debts. This leaves only the low-interest loan to repay.

You can also use an unsecured line of credit (LOC) or a balance transfer credit card to consolidate your debt.

Learn more about debt consolidation »

Debt Management Plan

A debt management plan (DMP) offers many of the same benefits as debt consolidation. You enjoy one monthly payment and minimize interest. The difference is that you do not get new financing with a DMP.

Instead, a non-profit credit counselling organization helps you set up a repayment plan. They work with you to find a monthly payment that works for your budget. Then they work with your creditors to reduce or eliminate interest charges applied to your balances.

You still owe your original creditors when you enroll in a debt management plan. Although you make one monthly payment to the credit counselling service, they distribute the payment to your creditors each month on an agreed schedule. A debt management plan is essentially a professionally-supported repayment plan that consolidates your debt.

Explore debt management plans »

Debt Settlement

With debt settlement, a private debt settlement company assists you in getting out of debt for less than what you owe. They negotiate with your creditors to get them to accept a percentage of the debt owed. Then your creditor agrees to discharge the remainder.

This may sound like a great deal, but it can do significant damage to your credit and even lead to lawsuits and wage garnishment. What’s more, debt settlement companies may charge high fees when they are unsuccessful at getting settlements in your favour.

So, while debt settlement is a solution that’s available to Canadians, it’s not recommended in most cases. If you do not think you can pay back everything you owe, we recommend moving onto the next solution—a consumer proposal.

Understand the dangers of debt settlement »

Consumer Proposal

A consumer proposal offers a better way to get out of debt for less than you owe. You consult with a Licensed Insolvency Trustee (LIT) in your province or territory. They will review your finances to determine if you are insolvent. If they determine you can repay at least some of what you owe, they will help you arrange a consumer proposal.

In the proposal, the trustee will review your finances and budget to determine what you can reasonably afford to repay. Then they will set up a repayment plan. You make payments to the trustee each month and the trustee distributes the payment to your creditors. Once you complete the payments, the remaining balances on your accounts are discharged.

While consumer proposal fees can be high, it’s a legal way to settle your debt for less than you owe. However, there are some downsides that you need to be aware of before you contact a trustee.

Get more information on consumer proposals »


Another solution that a Licensed Insolvency Trustee can facilitate for you is bankruptcy. If the trustee determines that you are insolvent during your financial evaluation, they will recommend that you file for bankruptcy.  Insolvency means that you cannot afford to pay your obligations and your debts outweigh the value of your assets.

When you file for bankruptcy, the trustee will oversee the sale of any assets that do not qualify for an exemption. The proceeds from the sales will go to pay your creditors. Then the remaining balances on your debts will be discharged.

Bankruptcy will damage your credit and become part of a permanent public record, so it should not be entered into lightly. However, if you are completely overwhelmed with debt, it may be the solution you need to get a fresh start.

Learn more about bankruptcy »

Debt you can include in these solutions

It’s important to note that you may not be able to include all your debts in the solution that you choose. Certain debts cannot be included in any solution. These include:

  • Support payments or alimony obligations
  • Court fines and penalties including parking tickets
  • Debts due to fraud
  • Student loans—if you have been a student within the last seven years

Even bankruptcy cannot discharge the types of debt listed above. If you file for bankruptcy, you will still be obligated to repay the debts listed above even after you receive discharge.

For other debt solutions outside aside from bankruptcy, you typically cannot include secured debts, such as a mortgage or a car loan. Even with a consumer proposal, you cannot discharge these secured loans.

With a debt management plan, you cannot include secured debts, the above-mentioned debts, or student loans. A debt consolidation loan may allow you to consolidate student loan debt, but it depends on the lender.

Compare debt solutions side-by-side

Debt Repaid– Debt Consolidation: Paid in Full
– Debt management plan: Paid in full
– Debt settlement: Partial repayment
– Consumer Proposal: Partial repayment
– Bankruptcy: Partial repayment
Credit Score Needed to Qualify– Debt Consolidation: Good (660+)
– Debt management plan: n/a
– Debt settlement: n/a
– Consumer proposal: n/a
– Bankruptcy: n/a
Cost– Debt Consolidation: Setup fees + interest charges; fees on consolidation loans generally equal 1% of the loan amount
– Debt management plan: Monthly administration fee set based on your budget + interest charges in some cases
– Debt settlement: Percentage of the original debt owed; may be charged upfront
– Consumer proposal: $1,500 filing fee + 20% of your future payments
– Bankruptcy: Base contribution cost of $1,800 for first-time filing + surplus income costs in some cases
Time Required to Get out of Debt– Debt Consolidation: 12 – 60 months
– Debt management plan: 36-60 months
– Debt settlement: 12 – 36 months
– Consumer proposal: Up to 60 months
– Bankruptcy: 9 months for first-time filing or 21 months for surplus income costs
Credit Score Impact– Debt Consolidation: Positive
– Debt management plan: Negative; 2 years
– Debt settlement: Negative; 6 years
– Consumer proposal: Negative; 3 years
– Bankruptcy: Negative; 6 years
Public Record– Debt Consolidation: No
– Debt management plan: No
– Debt settlement: No
– Consumer proposal: Yes
– Bankruptcy: Yes

Deciding which debt solution is best for you

Every financial situation is different, so it’s important to identify the best debt solution for your needs. This depends on:

  • how much you owe
  • what other obligations you have
  • your credit score
  • your budget

Debt consolidation is generally the best solution for Canadians in a stable financial position. It’s most likely to be successful if you have good credit, a balanced budget, and money in savings to cover emergencies.

You must be able to stop making new credit card charges while you pay off the consolidated balance. Otherwise, you can end up with more debt that you need to pay off instead of less.

A debt management plan is the next best solution when you cannot consolidate on your own. If you have bad credit or too much debt to qualify for new credit, a DMP will let you pay off everything you owe in full to minimize credit damage as much as possible. It will still create a negative credit notation, but it’s the shortest possible penalty for getting professional help.

If you feel that you simply have too much debt to pay back everything you owe, then you should contact Licensed Insolvency Trustee. They will help you determine if a consumer proposal or bankruptcy is the better option in your situation.

In most cases, for most consumers, debt settlement is not recommended. Settling debt outside of a consumer proposal should only be considered for individual debts that are in collections. If a collector makes an offer to settle an account for a percentage of what you owe, you can negotiate directly with them.

However, working with a private settlement company to settle multiple debts—particularly ones that are not in collections—can be extremely risky and dangerous for your finances.

Talk to a trained credit counsellor to identify the best debt solution for your situation.

Specialized debt solutions for homeowners

If you own your home, there are several unique debt solutions that you may be able to use. These involve borrowing against the equity in your home. Equity is the current market value of your home minus the remaining balance on your mortgage. You build equity as the value of your property increases over time and as you pay off your mortgage.

If you have equity available in your home, you may be able to get financing to access it. Options include:

  • Home equity line of credit (HELOC)
  • Second mortgage, also as a home equity loan
  • Reverse mortgage (only available to homeowners over age 55)
  • Mortgage refinancing

Always think carefully before borrowing against the equity in your home, as it increases your risk of foreclosure. If you cannot pay a credit card bill, the account can go to collections and you could face wage garnishment. However, if you cannot pay a mortgage, even a second mortgage, then you could lose your home.

The Canadian government has a helpful guide to borrowing against home equity. Prior to taking this step, you should first consult with a mortgage professional.

In addition, if you are considering using your home equity solely for the purpose of paying off credit card debt, it’s also a good idea to consult with a trained credit counsellor. They can help you evaluate if using your equity is the best option and if you’re in a good position with your budget to borrow safely.

Getting Out of Debt and Your Credit

One concern that most people have as they look for a debt solution is how it will impact their credit. After all, negative information that can come with certain debt elimination strategies can remain on your credit report for years. This can hold you back from financial recovery long after you’ve paid off your balances.

Out of the debt solutions discussed above, only debt consolidation allows you to avoid any credit damage. Since you get new credit to pay off your existing accounts, creditors essentially see it as simply paying off your balances early.

It’s important to recognize that any solution that requires you to get outside help or pay off your debt on an adjusted schedule will have at least some negative impact on your credit. For example, any revolving credit account such as a credit card that gets paid off on an adjusted schedule will show an R7 status notation on your credit report.

The length of time that this notation appears depends on which debt solution you use:

  • Debt management program: 2 years
  • Consumer proposal: 3 years
  • Debt settlement: 6 years

Keep in mind that while this notation is negative, it is better than the R9 notation that you get for bankruptcy. That notation will also remain for six years for your first bankruptcy. This is also true for debts that remain unpaid that get written off and sent to collections. Those will also remain for six years.

Weighing the cost of inaction versus the penalty for getting help

While this may lead you to think you should simply avoid getting help, be aware that the credit cost of inaction can be high as well. Since credit history is the biggest factor used to calculate your credit score, missing payments is one of the worst things for your score.

Thus, if you’re struggling to keep up, getting professional help may be the better option for your credit. You can act decisively to get out of debt instead of muddling along, missing payments, and facing charge-offs and collections.

Tips for Getting Out of Debt

Any debt solution you use will have different requirements and steps that you’ll need to follow. However, these general tips apply regardless of which solution you use.

Balance your budget so you don’t need to rely on credit

A balanced budget will be essential as you move forward from the debt challenges that you’re facing. You need to be able to stop making new charges on your credit cards. Otherwise, you’ll just have new debt that you need to pay off.

Not only do you need a budget to ensure that you spend less than you earn, but you also need to build in savings. Emergency savings is essential for covering unexpected expenses that inevitably arise. Most experts recommend that you should save ten percent of your take-home income each month or each paycheque.

If you cannot balance your budget even with the debt solution you want to use factored in, then you may continue to have issues. For example, if you use a loan to consolidate and then make new charges, you can end up with more debt instead of less. Thus, if consolidation only helps you break even and you’re still living paycheque-to-paycheque, you may want to consider other solutions.

The goal is to pay everything off in five years

A good rule of thumb for any debt solution is that you want to be able to become debt-free in five years or less. Experts say any longer than that can be risky. It can be difficult to stay motivated and see your solution through to the end.

Motivation will be a big factor in determining how successful you are at eliminating your debt. In the beginning, it’s easy to stick to a budget and do what’s required to start paying down your balances. However, as time goes on, you may slip back into bad spending habits. The chances of this increase the longer you take to get out of debt.

Debt consolidation loans have a maximum term of five years. Debt solutions like debt management plans and consumer proposals also must complete in 60 payments or less. This means these solutions give you a definitive date, so you know exactly when you’ll be out of debt.

On the other hand, using an open line of credit (LOC) or HELOC means you don’t have that definitive date. You can essentially stay in debt forever, meaning you are more likely to run up new balances before you pay off your existing debt. So, while these open lines give you more flexibility, they can be counterproductive to the goal of actually getting out of debt.

Take time to understand the root cause of your debt

Another important tip as you work to get out of debt is to understand what led you into financial hardship. Was there a key event that led to your debt problems, such as divorce or unemployment? Were your finances stable before that event? How much emergency savings did you have in place?

It’s important to ask questions like these so you can take steps to avoid debt in the future. It can help you discover ways that you can adjust your financial strategy to ensure greater stability in the future. That way, once you get out of debt, you can stay that way.

Work with a trained credit counsellor to identify the best debt solution for your needs.

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