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Many Canadians get themselves in a position where their personal debt keeps growing and growing. Sometimes out of control! It could be credit card debt, mounting rent or utility costs, personal loans, or even money owing on taxes. The list goes on.
At this point, you may need the help of a Licensed Insolvency Trustee or accredited debt solutions agency to help you put together a structured plan to address your debt head-on. In Alberta, there are several types of debt repayment plans available.
Each is designed for unsecured debt (debt where there is no asset attached to it). Each has its advantages. But which is right for you?
Consumer Proposal
A legally binding debt settlement agreement between you and your creditors. A Licenced Insolvency Trustee will present an interest-free repayment plan to your creditors on your behalf, based on your circumstances and ability to pay. It involves a single monthly payment , provides creditor protection, and will typically reduce the total amount of debt you’re required to repay. It can include CRA tax debt and is a preferred choice for protecting assets.
Personal Bankruptcy
A bankruptcy is usually the last resort for those facing overwhelming debt. While it will typically be the least expensive and the shortest option, it has the most significant impact on your credit. It provides creditor protection as long as you earn your discharge from the process by completing both monetary and non-monetary duties. Bankruptcy, like Consumer Proposals can only be administered by a Licensed Insolvency Trustee.
Orderly Payment of Debts (OPD)
A legislated Alberta program administered by Money Mentors, where debtors apply to the Courts to consolidate unsecured debts into a single monthly payment to repay debts in full at a reduced interest rate. This program is legally binding on creditors and is beneficial to those with lower levels of debt.
Debt Management Program
This is an informal debt consolidation plan administered by the Credit Counselling Society, where debt is repaid in full at a reduced interest rate to participating creditors. This program can benefit those with lower levels of debt, however it cannot deal with tax debt owed to Canada Revenue Agency.
Division I
Proposal
Similar to a Consumer Proposal (or Division II Proposal), it is administered by a Licensed Insolvency Trustee and is for individuals who owe more than $250,000.00 (excluding secured debt attached to your principal residence). It is also available to insolvent businesses whether they are small or large multinational corporations. For more information, please contact BNA directly.
One factor that may guide your decision to choose one debt repayment solution over another is the amount of unsecured debt you owe. These limits do not include any debt related to mortgage(s) on your principal residence (the home you live in).
Because they involve repaying the full amount of the debt, the Orderly Payment of Debts and Debt Management Program are typically designed for those with more manageable debt levels relative to your ability to pay.
There’s no such thing as a free ride when it comes to getting out of personal debt. There is an associated cost with each option… including bankruptcy (despite the misconception that you simply walk away from all obligations).
Here are some general guidelines on the overall cost for each option. Because every case is different, you will need to consult with a Licensed Insolvency Trustee, Money Mentors, or the Credit Counselling Society to discuss your situation.
NOTE: In either a Bankruptcy or a Proposal, the Trustee is paid out of the amount they collect in the process.
A monthly fee is paid to the Licensed Insolvency Trustee to cover their administration costs. If you have surplus income (based on a formula set by the Office of the Superintendent of Bankruptcy), your payments will fluctuate. The amount is based on your household income and the size of your household. Another factor in the cost of your bankruptcy, will be the amount of equity in your assets (eg. Vehicle, principal residence, vacation or rental property, etc.).
The negotiated amount will typically be more than what the creditors might expect to receive if you were to declare bankruptcy. The creditors will ultimately determine what they are willing to accept for repayment.
You will be required to repay your debts in full, at a 5% interest rate. In addition, Money Mentors will require a small fee of approximately $50 per month.
You will be responsible for repaying your debts in full, plus a negotiated interest rate (which can be greatly reduced or waived completely) with participating creditors. There will be an additional nominal administration fee of up to $75 per month.
It’s important that before beginning any debt repayment plan that you understand the time frame you are committing to. You should consult with a Licensed Insolvency Trustee or one of the other debt agencies mentioned above to determine which option is best for your unique circumstances. If the individual or organization you speak with can’t administer a particular program or plan, they will point you in the right direction.
For those who are in over their head when it comes to debt, the greatest source of fear, stress and worry are the constant calls from creditors and debt collection agencies.
The good news is that all of the debt repayment options discussed provide creditor protection. The level of protection varies.
In a Consumer Proposal, a Licensed Insolvency Trustee will facilitate a legally binding repayment contract between you and your creditors. The terms must be accepted by the majority of the creditors. Once accepted all creditors must abide by the terms, whether they agreed or not. As long as payments are made as agreed upon, you are fully protected from all collection activities and legal action by all creditors included. All creditor communication must go through the Trustee.
Once your Bankruptcy is filed and you abide by the duties and, you are legally shielded from any attempt by creditors to recover debt included in the bankruptcy filing. All creditor communication must go through the Trustee.
As long as the terms negotiated with your creditors are met, they are prevented from contacting you. All communication must be done through Money Mentors.
The Debt Management Program for Alberta offers informal protection once the creditors accept the repayment schedule. As long as you meet the repayment terms, consenting creditors will generally leave you alone, although they are not legally required to.
If you have tax debt, you can include this debt and add Canada Revenue Agency to your list of creditors with any of the following:
• Consumer Proposal
• Division I Proposal
• Bankruptcy
• Orderly Payment of Debts
Tax debt is not eligible under the Debt Management Program.
If you are eligible for a tax refund while enrolled in a Consumer Proposal, Orderly Payment of Debts or Alberta Debt Management Program, you are allowed to keep the refund without penalty. The caveat here, is that if you owed monies to Canada Revenue Agency, they may set off your refund for the first year that you enrol in in either a Consumer Proposal or Orderly Payment of Debts. If you owe Canada Revenue Agency and enrol in the Debt Management Program, they will offset your tax refunds until your tax debt is fully repaid.
In the case of a Bankruptcy, tax refunds for the years before and the year of bankruptcy must be paid directly to your Licensed Insolvency Trustee for the benefit of your creditors.
Protecting any owned or secured assets like a home, property, vehicle, furniture, tools, heirlooms, art collections etc. is often a top priority (and concern) for those facing insolvency.
Provided you are up to date on payments against any pledged assets, these personal assets are protected under an Orderly Payment of Debts or Debt Management Program. They are also protected under a Consumer Proposal (and Division I Proposal) unless an asset is pledged as part of the proposal terms.
Assets are not always protected in a bankruptcy. However, in Alberta, the Courts are often reluctant to take away personal assets where possible and instead will give you time to repurchase the non-exempt equity from your bankrupt estate. If you are unable to repurchase the equity, it may be necessary for the Trustee to liquidate assets with significant value.
Protecting any owned or secured assets like a home, property, vehicle, furniture, tools, heirlooms, art collections etc. is often a top priority (and concern) for those facing insolvency.
Provided you are up to date on payments against any pledged assets, these personal assets are protected under an Orderly Payment of Debts or Debt Management Program. They are also protected under a Consumer Proposal (and Division I Proposal) unless an asset is pledged as part of the proposal terms.
Assets are not always protected in a bankruptcy. However, in Alberta, the Courts are often reluctant to take away personal assets where possible and instead will give you time to repurchase the non-exempt equity from your bankrupt estate. If you are unable to repurchase the equity, it may be necessary for the Trustee to liquidate assets with significant value.
All of the plans discussed will protect you from having a creditor garnishee against your wages.
The exception is the Debt Management Program, where this is negotiable.
*Specific conditions apply to garnishees involving spousal or child support. For details, speak to a
Licenced Insolvency Trustee.
Every adult in Canada has a Credit Score. It is a profile that helps lenders determine if you are a low-risk borrower or if you are a higher-risk borrower based on your financial history. This rating is compiled by Canada’s Credit Reporting Agencies (or Credit Bureaus): Equifax Canada and TransUnion Canada.
If you are facing insolvency, and enrolled in a structured debt repayment program, a #7 rating will appear on your credit score for a set period. In the case of a bankruptcy, a #9 rating appears. This may make it difficult to apply for credit card or loans while you are actively in a plan.
The good news is that if you meet all the terms and conditions of your debt repayment plan, you may be able to successfully apply for credit, although terms and conditions may apply.
When you’ve completed your repayment plan you will want to do all you can to prevent it from happening again.
By learning some basic strategies around budgeting and planning, you can learn to be better at managing your money. Several provincial resources are available to help you with financial planning and budgeting.
There are many tools available online or through financial institutions that can help you track your income and expenses. Once you understand where your money is going, you can feel comfortable in your ability to cover expenses – and hopefully, begin saving for future goals.
Some people find that using cash envelopes or digital budgeting apps helps them stick to their budget. The most important thing is to find a system that works for you. With some time and effort, you can develop sound financial habits that will serve you well in the future.
Financial struggles can take a toll on both mental and physical health. They can cause stress, anxiety, and depression, which can also lead to physical health problems. Fortunately, many resources are available to help people through times of financial difficulty.
Mental health resources can provide support and guidance for dealing with the stress of financial struggles.
Financial assistance programs can help with short-term needs such as food and housing. Many online resources provide tips and advice for dealing with financial difficulties. By taking advantage of these resources, people can get the support they need to weather financial storms.
