Debt Negotiation in Ontario: A Simple Guide

If you are living in Ontario and are dealing with large amounts of debt, you could consider negotiation to solve your debt problems. By negotiating with creditors, you can often settle your debts for less than you owe. Mastering this process can help you regain financial stability and avoid Bankruptcy. This guide will walk you through the basics of debt negotiation in Ontario, including how it works, its benefits, and potential pitfalls.

What is Debt Negotiation?

Debt negotiation, also known as debt settlement, involves talking with creditors to reduce the total debt amount. You can do this by yourself or through a debt settlement company. The aim is to reach a deal where the creditor accepts a lump sum payment that is less than the full debt amount, and in return, forgives the remaining debt.

Alternatives to Debt Negotiation in Ontario

Other options for managing debt include:

• Credit Counselling: Work with a credit counsellor to create a debt management plan and budget strategy.
• Debt Consolidation Loan: Combine multiple debts into one loan with a lower interest rate, simplifying repayment.
• Consumer Proposal: A legally binding agreement to pay part of the debt over a certain period, which creditors must approve.

How Debt Negotiation Works

1. Assessing Debt: Start by calculating your total debt and identifying which debts can be negotiated. Not all debts can be negotiated; secured debts like mortgages and car loans are usually excluded.
2. Contacting Creditors: Once you know which debts may be open to negotiation, you or a debt settlement company contacts the creditors to propose a settlement. This involves providing detailed financial information to show that you can’t pay the full amount.
3. Negotiating Terms: Negotiations can take time and require persistence. Creditors may initially reject settlement offers but may agree to a reduced amount if they believe it’s the best way to recover some money.
4. Settlement Agreement: If a creditor agrees, a written agreement is created. This document outlines the terms of the settlement, including the lump sum payment amount and the payment deadline.
5. Payment: You make the agreed-upon lump sum payment. After this payment is made, the creditor forgives the remaining debt

Benefits of Debt Negotiation

• Reduced Debt: The biggest benefit is that you owe less money, making it easier to manage your finances..
• Avoiding Bankruptcy: Debt negotiation can be a good alternative to Bankruptcy, which can have long-lasting negative effects on your credit score and financial stability.
• Single Payment: Debt negotiation often results in a single lump sum payment, making the repayment process simpler.

Potential Drawbacks

• Credit Impact: Debt negotiation can hurt your credit score. Settled debts are marked as “settled” on credit reports, which can be seen as less favorable than debts that are fully paid.
• Tax Implications: Sometimes, the forgiven debt amount is considered taxable income, which can lead to tax liabilities.
• Fees: If you use a debt settlement company, there may be fees involved. It’s important to understand these fees upfront to avoid additional financial strain.
• No Guarantee: Creditors are not required to accept settlement offers. There’s a risk that negotiations may not result in a favorable outcome.

Does Debt Negotiation Affect Your Credit?

Debt negotiation (debt settlement) will impact your credit score. Private settlements stay on your credit report for six years, while a Consumer Proposal remains for three years after the final payment or six years after filing, whichever comes first.

Comparing Debt Negotiation and Debt Consolidation

Both debt negotiation and debt consolidation offer the benefits of a single monthly payment and reducing the total amount paid to get out of debt.

However, debt consolidation requires repaying the full principal, usually with interest, while debt negotiation involves repaying only a portion of the principal.

The impact on credit also differs: using a personal loan for consolidation doesn’t harm credit if payments are timely. Debt management plans result in a negative credit remark for two years after completion, Consumer Proposals for three years, and debt settlements for six years.

What Percentage of Debt is Typically Accepted in a Settlement?

A typical debt settlement in Canada amounts range from 30% to 70% of the owed debt. The exact percentage depends on factors such as who holds the debt, its age, and the skill of the negotiators. Debts sold to third-party collectors are often easier to settle for a lower percentage because these agencies purchase the debt for a fraction of its value and can still profit. In contrast, original creditors may require a higher settlement percentage or be less willing to settle.

Risks of Using a Debt Settlement Company

While hiring a debt settlement company can save time and hassle, there are risks:

• No Guarantee of Settlement: Companies can’t promise results; creditors may not accept the offer.
• Interest Charges Continue: Creditors can keep charging late penalties and interest, worsening your financial situation.
• High Fees: You might pay fees upfront, monthly fees, and a large deposit, which can add up.
• No Legal Protection: Debt settlement companies can’t stop wage garnishments or collection calls. Only a Consumer Proposal can provide legal protection.

Filing a Consumer Proposal

Consumer proposals are administered by Licensed Insolvency Trustees (LITs). A Consumer Proposal is a safer debt settlement option in Canada than debt negotiation with unique benefits:

• Legally Binding Contract: If the majority of your creditors agree, all are bound by the proposal.
• No Upfront Fees: Payments to creditors start after filing the proposal with the government.
• Immediate Relief: Collection calls and legal actions stop once the proposal is filed.
• Regulated Process: LITs follow strict regulations, ensuring fair treatment.
• No Interest Charges: Interest stops accruing once creditors agree to the proposal.

In conclusion, debt negotiation, or debt settlement, is a solution for Ontarians struggling with substantial debt. While debt negotiation in Ontario can help reduce debt and avoid Bankruptcy, it can also negatively impact credit scores and may have tax implications. Considering alternatives like credit counselling, debt consolidation, or a Consumer Proposal, which is a legally binding agreement with unique benefits, is advisable.

At Adamson & Associates Inc., we have established a strong reputation as a trusted Ontario Licensed Insolvency Trustee and Consumer Proposal administrator. Our commitment is to deliver top-notch professional insolvency services to our clients. We recognize that Bankruptcy can be a challenging and confusing experience, so we are dedicated to guiding our clients through each step of the process, alleviating their stress and anxiety about the future. Contact us for a free, no-obligation consultation today.