One thing is certain – life is full of ups and downs. If you’re currently in over your head in debt, it may be hard to see the light at the end of the tunnel.
With your reputation, credit score, home, business, and even your car on the line, the outlook can certainly appear bleak.
This is usually what leads most people to research their options for debt forgiveness in Canada.
Currently, Canada offers two legal options for debt forgiveness – bankruptcy or a consumer proposal settlement.
Below, I’ll explain a bit more about each of these options for debt forgiveness, outline the pros and cons of each, and answer some of the most commonly asked questions about debt relief in Canada.
Roman author (and occasionally, philosopher) Publilius Syrus once wrote, “Debt is the slavery of the free.”
Over 2,000 years after his time, this statement rings truer than ever. In fact, I’d argue that debt has become an even bigger issue today, thanks to our fast-paced financial ecosystem that offers financing for just about everything.
I’ve met countless young adults who ruined their credit with bad debt and had to spend their 20s rebuilding after their mistakes.
In the days of ancient Rome, unpaid debt could see you put into the gladiator pits until you were able to repay the amount with your winnings (if you survived).
Thankfully, we’re a bit more civilized today.
There are currently two options for debt forgiveness in Canada:
- Consumer proposal (often referred to as a “settlement”)
These options allow you to either write off all of your debt or settle your debts for a lower, more affordable amount.
That being said, it’s important to note that debt forgiveness isn’t exactly consequence-free. Both bankruptcy and consumer proposal settlements can negatively impact your credit as well as your eligibility for future loans and financing.
But hey – at least you don’t have to pick up a sword and fight in an arena, right?
The Two Legal Options For Debt Forgiveness In Canada
Every Canadian has the legal right to apply for bankruptcy or offer a consumer proposal to a debtor. Of the two options, bankruptcy tends to have the most impact (both positively and negatively).
Before you jump into either one of these debt relief options, let’s take a few minutes to go over each.
If you’re in debt so deep that you can’t possibly see a way out, then filing for bankruptcy can give you a chance to start over from scratch with a clean slate.
That’s right – when you file for bankruptcy, all of your personal debts are cleared from your account. In other words, “You don’t owe nobody nothin’.”
However, filing for bankruptcy isn’t a walk in the park. It can be a complicated legal proceeding that involves lawyers, the court system, and your creditors. You’ll have to provide solid proof that you are incapable of repaying the debt.
If you thought you could hide some of your income, think again. You’ll have to show the courts everything.
The entire process is overseen by a bankruptcy trustee. Trustees are lawyers and legal experts who work directly with the Canadian government to represent your case to the courts and your debtors.
If your bankruptcy filing is approved (which can take anywhere from one to two years), then all of your debts will be forgiven.
The main disadvantage of bankruptcy is that it can severely impact your credit score. In most cases, your credit score will be dropped to the lowest of the low. Thankfully, the bankruptcy report will only remain on your credit report for six years.
After this period, you’ll be able to start rebuilding your credit, which means you may be able to receive credit in the future. Bankruptcy isn’t a death sentence. However, it is something that you should carefully consider before filing for.
Believe it or not, some of the wealthiest billionaires in Canada have filed for bankruptcy at some point in their careers. As long as you’re smart with your money, invest it wisely, and save money wherever you can, you can not only survive but thrive after bankruptcy.
2. Consumer Proposal
Bankruptcy is, by far, the most impactful debt forgiveness plan in Canada. It’s capable of eliminating all (or most) of your debt and your credit score at the same time.
Bankruptcy isn’t the only solution for debt forgiveness in Canada, though.
Consumer proposals are far more common and give you a way to settle your debts without completely destroying your credit. If your proposal is accepted by your debtor, the amount you owe (including your monthly payments) may be significantly reduced.
A licensed trustee will represent your case to the organization you owe money to. During this process, you’ll have to provide proof that you’re unable to afford to make your monthly payments or pay your debt off entirely.
Depending on the circumstance, a consumer proposal could have two outcomes, including:
- The total amount you owe will be reduced
- The total amount you owe will remain the same, but monthly payments will be reduced
Let’s just say that you owe a debtor $35,000 and are repaying the loan at a rate of $1,000 per month. Unfortunately, you broke your leg and were unable to work for several months, which caused you to fall behind on your payments.
In this case, you could work with a trustee to reduce the amount of your total debt to, say, $25,000. Alternatively, your minimum monthly payment may be reduced to a more affordable amount.
To be approved for a consumer proposal settlement, you must have at least $1,000 in debt and no more than $250,000 in debt, or $500,000 for married couples.
If you have less than $1,000 in debt, you won’t be eligible for a settlement and will be required to pay the amount you owe in full. If you have over $250,000 in personal debt, then bankruptcy may be your only option for total debt forgiveness.
Now that you know a little bit more about how bankruptcy and consumer proposals work, let’s take a closer look at some of the pros and cons of each of these debt forgiveness plans in Canada.
While bankruptcy can leave your credit in the gutter, it has several upsides, including:
- Your major debts will be wiped out
- You should be allowed to keep your home and your car (as long as you continue making payments on time)
- You’ll be able to start over and learn from your mistakes
Bankruptcy all but erases your debt from the books, giving you a chance to start over. However, it comes with some considerable drawbacks, including:
- Filing for bankruptcy typically reduces your credit to the lowest score
- You may be unable to receive a loan or credit card approval for six years or more
- Bankruptcy doesn’t erase all debts, and you’ll still have to pay student loans, tax debts, and court-ordered restitutions
Consumer proposals are a simpler and less impactful way to receive debt forgiveness (or reduction) in Canada. Here are some of the benefits and drawbacks of agreeing on a settlement.
Although a consumer proposal settlement doesn’t erase your debt the same way that filing for bankruptcy can, it can still benefit you in the following ways:
- A settlement can reduce your total debt owed
- A settlement can reduce the amount of your monthly payment
- A settlement can stop negative reports from missed payments on your account
- Once paid in full, the account will be marked as “settled” instead of “delinquent” on your credit score
Consumer proposals are very useful if you’re not in too much debt, as they can give you a chance to catch up by reducing the amount that you owe. However, consumer proposal settlements still have a few drawbacks, including:
- Your debt won’t be completely erased
- Consumer proposals can’t be applied to certain types of debt, including student loans, taxes, or court-ordered payments
- Your credit score may not improve until you pay the settled amount in full
Now that you know more about the pros and cons of both bankruptcy and consumer proposal settlements in Canada, let’s compare both of these debt forgiveness options side-by-side:
|Can eliminate most forms of private debt||Can reduce most private debts|
|Can’t be applied to tax debt, court fines, or student loans less than seven years old||Can’t be applied to tax debt, court fines, or student loans less than seven years old|
|Can destroy your credit score for up to six years, leaving you with a very low score||Can prevent your credit score from dropping further by reducing the number of missed payments on your credit report|
|To be eligible, you must have at least $1,000 in unsecured debt||To be eligible, you must have at least $1,000 in unsecured debt|
|Bankruptcy proceedings can take one to three years to complete||Consumer proposals can usually be set in place in less than two months|
Personal Bankruptcy vs. Business Bankruptcy In Canada
In Canada, there are two forms of bankruptcy:
- Personal bankruptcy
- Business bankruptcy
For the most part, the process is the same to apply for both forms of debt forgiveness. You’ll work with a government-appointed trustee who will be responsible for representing your case by proving that you are, in fact, unable to pay the debts that you owe.
The main difference between filing for personal and business bankruptcy is liability.
If you’re personally liable for your business (i.e., a sole proprietorship or single-member LLC), then filing for bankruptcy could negatively impact your personal credit score.
However, if the company is an independent corporation that you’re not personally liable for, then filing for bankruptcy should not affect your personal credit score.
Qualifying for debt forgiveness in Canada isn’t difficult in and of itself. Any Canadian resident has the legal right to do so. That being said, getting your debts forgiven isn’t always quick and easy.
In addition to the fees required to file for bankruptcy or a consumer proposal, you’ll need to work with a trustee who will review all of your finances to verify your claim.
Getting approved for debt forgiveness in Canada can take anywhere from a couple of months for a simple settlement to several years for a major bankruptcy case.
To wrap up, here are a few quick answers to some of the most commonly asked questions about applying for debt forgiveness in Canada.
In most cases, receiving debt forgiveness will affect your credit score. Filing for personal bankruptcy can severely lower your credit score, while a consumer proposal may be able to help you improve your score (or at least reduce negative marks on your report).
In Canada, you’ll need to account for a minimum fee of $1,800 to file for bankruptcy. This fee could be greater if you’ve filed for bankruptcy multiple times or if you’re filing for a larger business.
Thankfully, you’ll usually be given the option to set up a payment plan for bankruptcy fees.
Filing for bankruptcy should not affect your mortgage, and you should be able to keep your home (as well as most other assets).
That being said, filing for bankruptcy won’t eliminate your mortgage or installment payments on an auto loan. If you want to avoid foreclosure, you’ll need to continue making your monthly payments.
Consumer proposal settlements are the quickest way to receive debt relief and typically take less than two months to process. Bankruptcy proceedings, by contrast, can take anywhere between 9 months and 36 months.
Although debt forgiveness can relieve you of the weight of debt on your shoulders, it’s not without consequences. Before filing for bankruptcy or submitting a consumer proposal, analyze your budget and be sure that it’s the right choice for your situation.
In some cases, the best way out of debt is to consolidate your debt into a single, easier-to-pay loan.
LoanConnect is a great platform that allows you to compare debt consolidation loans from various creditors, so you can get the best interest rate. Keep on reading to see my full review of LoanConnect!