People burdened with debt are usually under a lot of stress and anxiety. That’s why it often comes as a relief to learn that there are many options to deal with debt, including tax debt. It can be very empowering to sit down with a Licensed Insolvency Trustee to discuss all your options to get out of debt. A licensed insolvency professional will be able to discuss all options, which may include:
When discussing options, it is often a good idea to start by discussing the bankruptcy option, and work backward from there. This helps to understand the minimum obligations and amount of money that would likely be required in a bankruptcy to obtain relief from the debts. Many people pay very little to be released from their debts in bankruptcy. However, every situation is different and should be reviewed.
A consumer proposal is an alternative to bankruptcy, and allows people to make a settlement offer to their creditors. In a proposal, people usually to pay a portion of the debt (which might be as low as 30%) over five years and are released from the remainder of the debt at the end. Generally speaking, the consumer proposal must offer more than what the creditors would receive in a bankruptcy before the creditors will accept it. If a majority of the unsecured debt votes to accept the consumer proposal, then all the unsecured creditors must follow it, with a few exceptional types of debts that may survive.
Debt Management Plan
If the person has the ability to repay their debts, but simply needs help with their budget and/or a reduction in the interest rate(s), a certified not-for-profit credit counsellor may be able to set up a Debt Management Plan (“DMP”). This DMP usually pays the debt in full over five years with reduced interest, or no interest at all. DMPs cannot typically help people with tax debts.
Credit Counselling / Budget
If the person has the ability to repay their debts, but simply needs to reduce spending and/or set up a budget, they may simply set up their own budget and pay off the debt over time; or they may ask for counselling from a certified not-for-profit credit counsellor. The person must have discipline to make a budget work!
If a bank is willing to lend enough money to combine all the debts into one with a lower interest rate, this may be a solution because it lowers the monthly payment and makes the debt more affordable. This will likely not be an option for those with damaged credit. Those who own their home with sufficient equity may consider refinancing their mortgage, or obtaining a second mortgage, in order to combine all the debts into one mortgage with a lower interest rate. This option does not decrease the total amount of debt.
Workout / Informal Debt Settlement
Those with very few creditors may attempt to settle directly with their creditors by asking them to accept a certain lump sum to settle the debt. Such agreements should be clearly documented with the assistance of legal counsel if possible. Those with many creditors may also attempt workouts, however, it may be very difficult to obtain satisfactory agreements from all.
Some people have enough assets to sell and pay the debt off (e.g. house, jewelry, RRSP). However, many people are not willing to sell their house and uproot their family. Furthermore, people should be aware of possible tax consequences of liquidating assets and the long-term impact it may have on their retirement plan. Retirement funds may be protected in a bankruptcy or proposal, and the tax consequences and impact on retirement plans should be considered before collapsing retirement funds to pay off debts.
As the old saying goes, “you can’t get blood from a stone.” In other words, many people with no assets or income simply choose to do nothing and hope that the creditors simply just go away. This may work, but it is usually not a good long-term option, especially for those who cannot tolerate creditor harassment, those who wish to deal head-on with their debts, or those who wish to rebuild their finances for the future.
Look before you leap
Before deciding on an option, people should consider the overall benefit and cost of each option in terms of damage to credit rating, costs to sell, tax consequences, interest costs, professional fees, lender’s fees, broker’s fees, administrative fees, etc.
The best solution depends on the individual situation and personal preferences, and may involve only one option, or a combination of many options. A licensed insolvency professional can explore all these options. Contact us for a free, non-obligation consultation to review all your debt relief options.