Debt Settlement

In Canada, there are three main types of settlements:

Settlement in full

The lump sum repayment of a debt in full to avoid the accrual of further interest rates or fees, or, more commonly, to prevent a pending small claims case from going to court.

Settlement in part

The lump sum or installment payment plan of a portion of one’s debt, most often offered when other collection methods have failed or the person cannot be sued for the debt.

Negotiated Settlement

The repayment of a debt in full or in part which is facilitated by another body such as a credit counselling agency or one of the many paid settlement companies, typically because the creditor(s) would not offer settlement themselves.

Lump sum payments are the opposite of a monthly payments, where instead of paying smaller payments over time you pay a larger ‘lump’ payment upfront.

When a debt is settled the difference between the offer amount and the remaining balance is forgiven. For example, if you owe $1000 and settle for $800, the remaining $200 is forgiven but the whole debt is considered paid.

Unlike settling with a collection agency, credit card settlement usually involves a settlement directly with the credit card company, often as a final attempt made before they will sell the consumer debt owed to a third party collector.

Typically, credit card settlements will not discount the amount borrowed but may forgive interest, late payment fees, and other penalties. If the settlement involves a credit counselling agency or other negotiator, the discount is larger.

Martha Small struggled to manage the credit cards she held jointly with her husband after he passed away. As a result, Martha missed several payments and accrued several unwanted fees totally $20,000. When she called the credit card provider, they offered to settle the debt at $18,200 which would forgive all the accrued fees but not the original balance. Martha agreed to this settlement offer and used a portion of her husband’s life insurance to settle debt.

• Consider the total value of your debt(s) and confirm that settling makes the most financial sense vs. the other options available to you
• Confirm the amount of money you must settle with, keeping in mind you do not want to make the situation worse by borrowing from a high-interest lender, credit card, or anyone you will have to repay
• Secure an offer to settle debt from the creditor (or) reach out to a non-profit credit counselling agency to help negotiate a settlement for you
• Complete the transaction and ensure you are provided a receipt

For unsecured loans, the process of settling is identical to that of credit card settlement. For secured loans, the loan must typically be detached from the property before settling the debt. While this most commonly affects vehicle loans, it can affect any type of financed property where there is a lien involved.

Steps for loan settlements

If the debt is unsecured

• Confirm that settlement is right for you
• Secure or confirm funds to settle with
• Secure or negotiate a settlement offer
• Pay your settlement as agreed

If the debt is secured

• Negotiate the return of the property
• Confirm the balance left owing afterwards
• Follow the steps for unsecured debt

While settlements are a great option for individuals who have the lump sum funds needed to negotiate, debt settlement is not an option for everyone.

Negotiated settlements

Are administered by a credit counselling agency, allowing you to settle with ALL your creditors without negotiating alone.

Debt management programs

Offer an affordable low-or-no-interest payment plan for individuals who do not have the funds to settle their debt.

Consumer proposals

Are a good choice when you have more debt than be reasonably repaid in full and offer legal protection from wage garnishment.

Unlike consumer debts like credit cards or loans, government debts must typically be negotiated directly with the governing body responsible unless involving a trustee (such as with a consumer proposal or personal bankruptcy).

CRA debt settlement

If you owe backed income taxes, GST/HST, CERB, or other government debt related to income/earnings to the Canada Revenue Agency, it is important to contact the CRA to negotiate as soon as you are made aware of any debt owing so the debt does not (a) increase or (b) lead to wage garnishment or the withholding of other monthly benefits. To reach the CRA, call 1-888-863-8657.

Other government debt

Other government debts incurred for programs such as student loans, disability or social support, medical expenses not covered by your provincial health plan, or money owed for provincial fines/infractions can also be negotiated directly.

ICBC debt settlement

Unique to residents of British Columbia, settlements for debts incurred with the Insurance Corporation of British Columbia (ICBC) can be negotiated directly by the consumer, or with the help of an accredited credit counsellor.

You don’t need to ‘settle’ for a settlement just because it’s offered!

Remember: If offering a settlement is something your creditor is willing to do it is because it benefits them—but that doesn’t always mean it benefits you.

While settlements can be helpful in some cases, they can also be harmful if you do not have a good understanding of ALL your options before making a payment plan. And, depending on how many debts you have, and how generous (or not) each creditor is when it comes to settlement costs, you may not be able to afford to settle every single debt on your own, exposing you to financial risk.

Reviewing your debt situation with an accredited, non-profit credit counsellor is free, confidential, and allows you to discuss what a creditor settlement would look like vs. other low-or-no-interest options before you make a commitment.