Debt Settlement Offers – The Options and the Pitfalls

The high consumer debt over the last few years has spawned a new industry of debt settlement companies.  Recently, you may have seen on the television or on the internet advertising from various companies offering to settle your debts for pennies on the dollar. They make it sound like an excellent solution to solving your debt problems. As with any agreement you are considering you need to read the fine print before you sign.

The debt settlement companies are only one of the alternatives available to you to resolve your debt problems. If you are in a situation where you are looking at alternatives to deal with your debts, you may benefit from having some information regarding each alternative.

Debt Settlement Companies

These organizations provide a service to individuals to negotiate settlements with creditors to reduce the amount you have to pay to resolve your indebtedness.  These companies provide this service to you for a fee – often times the fee is payable upfront. 

If you are considering participating in such a program, you should be aware of the fee structure and what results they will deliver before you sign.

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Debt settlement companies may do their best to negotiate with your creditors but participation by creditors is strictly voluntary. They may reach a settlement with some but not others.  You may end up with only a partial solution or no solution to your debt problem after having paid a significant fee.

Non-profit Credit Counselling Services

The non-profit credit counselling services can provide you with a program to put your financial house in order including advocating on your behalf to develop a repayment plan for your debts that would fit within your financial means. There is no charge to you for this service.

Participation by your creditors in a debt repayment plan would be strictly voluntary. You may have some participate while others may not.

Consumer Proposal under the Bankruptcy and Insolvency Act

A consumer proposal is a process whereby you make an offer to all of your unsecured creditors to pay them something less than what they are owed or to pay them in full over a period of time, up to 5 years.  A consumer proposal is lodged with your creditors through a Licensed Insolvency Trustee.

The benefits of this alternative are that once the consumer proposal is filed your creditors are prevented from commencing or continuing any legal action against you. This means that legal actions such as wage garnishments and the seizing of funds in a bank account would be stopped.

In addition, if the consumer proposal is approved, it would be legally binding on all of your unsecured creditors even those creditors that may have voted against the consumer proposal.

There is a cost to file a consumer proposal but this cost is borne by your creditors under the terms of the consumer proposal.

Each individual situation may make one debt settlement alternative more advantageous than another. The nature and composition of your debts will determine which alternative would be most appropriate.  Prior to signing any agreement you may wish to contact your lawyer.