The Degrees of Insolvency

So just where does debt settlement fit in the spectrum of solutions for those who find themselves in over their head, financially?

(We've talked about debt settlement before – this is where you hire a third party to negotiate with your creditors on your behalf, in the hopes you'll be able to settle for an amount that's less than you owe.)

In the lineup of options available, outside of the conventional ways people pay off their debts, we have settlement, credit counseling, consumer proposals and bankruptcy. Each has its own set of conditions and repercussions.

Liked this article? Don't miss another one. Follow us on Twitter or Facebook.Along with debt settlement, perhaps before it, credit counseling is a step or service that a lot of people consider or take advantage of before looking into a consumer proposal. Consumer proposals, covered by legislation in the Bankruptcy and Solvency Act, are put together by a bankruptcy trustee. When consumer proposals don't work, bankruptcy is the next step in line.

William Moores, counselor certification program manager at the Canadian Association of Credit Counseling Services, says there should be one more option included in this list: Self-help.

"The consumer can always contact creditors on their own," he says. This process though, he adds, can be very time consuming and challenging. "It would be much easier for a consumer to work with a certified credit counselor who has that expertise and the negotiation expertise to be able to work with creditors on their behalf. Although a debt settlement company might seem to offer a quick fix. We would be concerned about the apparent lack of rehabilitation."

Although a debt settlement company might set clients up with a budget to help them make their targeted payments, they generally don't offer the same range of skills training available at a credit counseling agency. On the flip side, credit counselors generally won't help clients pay less than they owe. They might step in and negotiate with creditors to stop interest from accumulating, but clients work to pay off 100 per cent of their debts.

Next up, consumer proposals are similar to the services offered by debt settlement companies except that they're part of a legislated process. The bankruptcy trustee takes the proposal to settle a client's debts to creditors; if 51 per cent of the client's creditors agree to the settlement, the agreement is binding on the others as well. If creditors do not accept the proposal, the client declares bankruptcy automatically.

Finally, bankruptcy can offer relief, particularly if a client has already attempted to go the debt settlement route but finds themselves facing lawsuits from their unhappy creditors. (Declaring bankruptcy is one way to stop legal action.)

Related:
What is Debt Settlement?
Debt Settlement or Credit Counseling? (Coming soon.)
Debt Settlement, Credit Counseling and Your Credit Rating (Coming soon.)

Kate McCaffery is a freelance writer in Toronto, Ontario. Visit mccaffery.ca/kate2.0/ for more information.

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