What is Debt Settlement?
Debt settlement is also described as debt negotiation, arbitration or credit settlement. It is an approach to debt reduction wherein debtor and creditor agree on a reduced balance that will be considered as payment in full. Creditors often accept reduced balances in a final payment. This is called full and final settlement. However, with debt settlement, the reduced amount can be spread over agreed terms.
The article takes up the following topics:
- Distinction between Debt Settlement, Consolidation and Management
- Debt Settlement System in Canada
- Steps in Debt Settlement
What is the Distinction between Debt Settlement, Consolidation and Management?
Debt settlement is often confused with debt consolidation or debt management. In debt consolidation and debt management, the consumer makes monthly payments to the debt consolidator. The latter gets a fee and passes the rest on to the creditors. Through this system, creditors continue to receive payments each month. In debt settlement, the consumer makes monthly payments, out of which the debt settlement company takes its fees for the legal work or negotiation. All payments are paid to the creditor. There are usually no monthly management fees but the debt settlement company may get the creditor to accept financial settlements.
What is the Debt Settlement System in Canada?
Debt settlement is a service in Canada to help individuals who are experiencing financial distress. It can be an alternative to bankruptcy.
Debt settlement may be appropriate if you meet the following standards:
- Solvency (Capacity to meet long-term expenses)
- You have more than $10,000 in unsecured consumer debt not including mortgage, car or student loans
- You have an income or the ability to raise some money. A consumer proposal and personal bankruptcy are only available to those who are insolvent.
Debt settlement may be particularly attractive to those with a poor credit rating or individuals who will not be borrowing large sums of money in the next five or six years. You can hire a firm to do debt settlement work on your behalf. When you enrol in a debt settlement plan, you will not make any payments to selected unsecured consumer creditors.
During this initial phase, you will be saving money that will be set aside to build your debt settlement fund. With the passage of time, the amount of money in your debt settlement fund will grow and your creditors will agree to accept lump sum settlements when an account has been in default for 24 months to 36 months. After several months, your debt settlement firm will contact your creditors and attempt to negotiate very favourable lump sum settlements.
What are the Steps in Debt Settlement?
Debt settlement in Canada is a better and preferred alternative to bankruptcy. Borrowers negotiate with crediting institutions or collection agencies to pay less than the amount they owe. In Canada, debt settlement, also known as debt help, debt reduction, and debt negotiation, is suitable for borrowers who have unsecured debts in the range of $10.000 – $250.000.
The types of debt that normally qualify for debt settlement are: unsecured business debts, leases and auto loans, unsecured lines of credits and personal loans, retail and department store credit cards.
If you think of opting for debt settlement, keep in mind that several factors will have an impact on the outcome. If the creditor believes you are on the verge of getting bankrupt, that creditor will be more willing to negotiate a debt settlement.
The first step to debt settlement is contacting your creditor. In fact, some of the creditors will periodically send you various offers for debt settlement. You have to create a settlement fund in order to make a good settlement offer to the creditor.
There are several disadvantages to debt settlement in Canada. First, the debt may be noted on your credit report as settled. Potential creditors will notice that it was not paid in full. You may be regarded as a risky borrower until the debt is wiped out from your file. Second, you need the settlement amount soon after you agree on settlement. If you are not able to save enough money in a settlement fund, this option might not be suitable for you. Debt settlement offers vary from one company to another.
Some creditors may come up with a reasonable proposal that will alleviate your financial burden. Others may offer less than what you have been hoping for. Whether you opt for a debt settlement program or negotiate the terms personally, you will go through the same steps and procedures.