Consumer Proposal, Debt Management or Debt Settlement, Which is Right for Me?
With consumer debt at an all-time high the number of companies offering credit counselling or debt settlement services are multiplying at an alarming rate. Many of these companies have large advertising budgets and slick websites designed to play on the fears of stressed out consumers who are in need of debt relief.
Let’s take a closer look at the programs they offer.
Debt Settlement Companies They claim to be able to reduce your debt by offering your unsecured creditors a percentage or pennies on the dollar. Here’s how it works…you make monthly payments over a set number of years directly to the debt settlement company, or in some cases you are required to set aside the funds in your own account. Once you have enough money saved they start negotiating settlements on your behalf. The trouble with these programs is that you receive little if any service until you have saved up enough money to offer settlements. In the meantime, your creditors keep charging late fees and interest and your balances continue to grow. Most creditors will continue to collect their debts and may take court action against you to recover their balances with no protection from the debt settlement company even though you are paying them a monthly service fee. The success rate of these programs have come under question by governments in both Canada and the U.S and several consumer warnings have been issued.
Credit Counselling Companies They offer debt management plans (DMP) or debt repayment plans (DRP) whereby you make a monthly payment to your unsecured creditors over a number of years (typically 4-5) until the debts are paid in full. Their programs require that you repay 100% of the original principle balance. Your creditors will be asked to stop or reduce their interest depending on what arrangements they have in place with the credit counselling company. Some credit counselling companies also offer debt settlement services whereby you make a lump sum payment to your creditors to settle your debts. Credit counselling companies make their money by charging administration fees and payments they receive from your creditors.
Consumer Proposal This option can only be provided by a licensed Trustee and is the only option that provides you with legal protection. A consumer proposal is typically done through monthly payments to your unsecured creditors however lump sum proposals are also possible. With a consumer proposal, you typically pay pennies on the dollar. As long as the majority of your unsecured creditors accept the consumer proposal then it is legally binding on all unsecured creditors. There is no interest or late fees charged by creditors and your consumer proposal is complete once you have paid the agreed upon amount.
For a free consultation over the phone or in person in Saint John, Moncton, Fredericton, Charlottetown or Dartmouth, please contact us. Powell Associates Ltd. is a licensed insolvency trustee focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses.