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Debt Settlement

What Is Debt Settlement and Is It Right for You?

If you owe a significant amount of money to your creditors and you’re struggling to make your monthly payments, you might consider debt settlement as a debt relief option. While it is possible to eliminate some of your debt through debt settlement, there are disadvantages that you should be aware of. If you’re unsure how to manage your debt, it’s time to speak to a professional. Reach out to a Licensed Insolvency Trustee (LIT) to discuss all of your debt relief options.

What is Debt Settlement?

Debt settlement is a debt repayment strategy that can be used to reduce the overall amount of money you have to pay to your creditors. The debt settlement process involves a negotiation between you and your creditors or between a debt settlement company and your creditors. The goal of the negotiation is to see if your creditors will agree to eliminate some of your debt in exchange for a lump-sum payment. If your creditors agree, you provide the lump sum amount to the debt settlement company and they pay your creditors.

What a debt settlement company can not do

Some debt settlement companies might claim to be able to do things that can not actually do. Be on the lookout for companies that make any of the following promises:

  • Guarantee to reduce your debts by a large amount
  • Guarantee your creditors will agree to participate in negotiations
  • Stop wage garnishment by creditors and collection agencies
  • Stop creditors’ phone calls
  • Offer to handle debt relief solutions like Consumer Proposal or Bankruptcies. Only Licensed Insolvency Trustees (LITs) can assist you with these options.

What are the risks involved with debt settlement?

While debt settlement is an option that can work in certain instances, there are risks involved with the process.

First, even if you hire a debt settlement company to negotiate on your behalf, your creditors are not obligated to negotiate. They can just say no from the very beginning.

Second, debt settlement companies often charge a high fee for their services. The fee is usually paid upfront or on a monthly basis. If you are already struggling to make your bill payments, the last thing you need is another fee added on top. Especially when you aren’t guaranteed the debt service company can help you to save money. Before working with a debt settlement company make sure you understand the extent of the fees and ask yourself if it’s worth it.

Before going down the debt settlement path also consider if you are capable of saving up a lump sum amount. Putting aside money for a lump sum payment can be extremely challenging while you are just trying to make ends meet. In the time it takes you to save up this money, your creditors may take legal action to collect the money you owe.

Prior to working with a debt settlement company, take some time to research. Make sure you know what services the company offers and exactly how much everything will cost. You can also check with the Better Business Bureau to see if the company has any unresolved complaints.

Can Debt Settlement Lower My Credit Score?

Yes, debt settlement can lower your credit score. When a debt is settled, your creditors will typically close the credit account, causing your credit score to lower. When you settle a debt it will stay on your credit score for six years.

Debt settlement can also have some positive influence on your credit score. When your debt is settled you will likely see a drop in your credit utilization ratio (how much credit your using versus how much credit you have available to you), which is good. If you are able to settle your debt, this can also give you a fresh financial start. As long as you have a plan to avoid debt moving forward, debt settlement can give you the starting point you need to rebuild your credit.

Alternative Debt Relief Options

Consumer Proposal

An alternative to debt settlement is a Consumer Proposal facilitated by a professional Licensed Insolvency Trustee (LIT). Unlike a debt settlement, a Consumer Proposal can effectively stop wage garnishment and creditor phone calls so you can find some immediate relief. In a Consumer Proposal, all unsecured creditors are required to participate, it is not optional like it is with debt settlement. In a Proposal, there is no upfront fee required and the amount you pay the LIT is federally regulated across Canada.

Debt Management

Another option is to work with a credit counsellor to develop a debt management plan. A debt management plan is used to consolidate your debts into one monthly payment. Your credit counsellor will typically contact your creditors to see if they are willing to waive or reduce the interest payments on your debt. They may also request to reduce your monthly loan repayments by extending the terms of your loan. Unlike a Consumer Proposal, debt management is not a legal proceeding and your creditors are not obligated to accept the plan.

Bankruptcy

While no one likes the thought of filing for Bankruptcy, this is also an option for those who are insolvent and drowning in debt. While Bankruptcy can sound scary, it’s a strategy that can provide you with immediate protection from your creditors and a new financial start.

Who Can I Talk to?

If you’re considering debt settlement as a way to deal with your overwhelming debt, it’s time to speak to a Licensed Insolvency Trustee (LIT). An LIT can go over all of the available debt relief options with you for free and help you decide which one is right for you. Plus, an LIT is the only professional in Canada who is legally able to provide all of the debt management tools you might need, including Consumer Proposal and Bankruptcy. Reach out to Adamson and Associates today for a free, no-obligation consultation. You can reach us by phone at 519-310-JOHN (5646) or by filling out our online contact form.

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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