Not every debt relief option in Canada is right for every Canadian debtor, and you should understand the pros and cons of each, especially how they pertain to your situation. Once you have done that, it is good to look at two different debt relief options side by side and get a true apples-to-apples comparison. Credit counselling and debt settlement often turn out to be the last two options that debtors compare, so this will help you evaluate the relative advantages and disadvantages of each of these debt solutions.
Do Debt Settlement and Credit Counselling Have Anything in Common?
In contrast to a debt solution such as personal bankruptcy, debt settlement and credit counselling do not force the hand of your creditors. Bankruptcy gives your creditors no choice but to write off your debt if you complete the bankruptcy requirements during the period between filing for bankruptcy and your bankruptcy discharge. This often means that your creditors will write off more than they would actually be willing to write off in ordinary circumstances. The same principle applies when it comes to the consumer proposal. Some creditors may be resistant to your proposal but will finally have to accept it if they are in the minority of those who are not agreeable to your proposal (a consumer proposal goes into effect when 51% of your creditors approve the proposal, forcing the minority to comply with the terms).
Because debt settlement and credit counselling do not force the hand of your creditors, they do not usually have the same impact on your credit report as bankruptcy or a consumer proposal. Both bankruptcy and the consumer proposal are recorded on your credit report for many more years—up to seven—than either a settlement or credit counselling, which makes the long-term financial impact far more drastic and negative on your credit.
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The Difference Between Consumer Credit Counselling and Debt Settlement
First, there is a difference in the amount of money that you will actually save under both debt solutions. Although you will save money on interest payments when you pursue credit counselling, your savings are usually not as significant with credit counselling as they are with debt settlement. When you qualify for debt settlement, your principal is reduced, which generates more savings over time even if your interest rate never changes.
The reduction in principal offered under debt settlement makes it the preferred debt relief option for most of those who owe more than $10,000 in unsecured debt. When you owe that much money and want to pay it off in a reasonable time frame, getting the principal reduced helps a lot. Reduced interest charges (a typical result of credit counselling) help, but because of the high principal amount, the savings you enjoy from month to month may not be all that significant.
Credit counselling is most appropriate for those who owe less than $10,000 and have difficulty with budgeting and other essential elements of financial management. That is because the education you receive with credit counselling will teach you everything you need to know about getting your spending under control. On a related note, if you make even an average income, you will likely be able to manage that amount of debt if all that gets reduced are your interest payments.
With an average income, a debt greater than $10,000 may be unmanageable, and having the principal reduced may be necessary to experience real relief.
Certainly, the savings available with debt settlement are significant, but it is also important to consider how debt settlement and credit counselling impact your credit report as well. There is no hard and fast rule here because debt settlement and credit counselling are similarly recorded on your credit report. Some people will experience more long-term effects from credit counselling than from debt settlement, and some will feel the effects of debt settlement more than they will credit counselling. Your adviser will be the best source of information on this. A debt settlement company can help you determine the probable long-term impact of settlement and credit counselling on your account.
Nevertheless, debt settlement may still be more advantageous to you than consumer credit counselling. Depending on the amount of debt that you have, a good credit counselling program may force you to spend many, many years paying your debt before it is fully satisfied. With a debt settlement program, however, you are usually able to get out of debt in less than three years.
Be Sure Before You Enroll
Whether you finally choose debt settlement or credit counselling, you should be sure that you are making the best decision for your finances. Fill out the debt relief form to learn more about your options and find out which debt relief solution is right for your situation.