Understand your debt relief options in Canada

If you’re struggling with debt, here are the options worth knowing about.

A consumer proposal is a legal agreement to reduce your debt, backed by the federal government.

A debt consolidation loan rolls your payments into one, often at a lower interest rate.

A debt management plan is set up through a credit counselling agency to repay your debts in full, usually with reduced interest.

Bankruptcy is the last resort, clearing most debts but carrying serious credit consequences.

Debt settlement involves negotiating with creditors to pay less than you owe.

Each route has its pros and cons depending on how much you owe and what you can afford. Most will affect your credit report.

There’s no government grant to pay off your debts. The federal government regulates two legal solutions: consumer proposals and bankruptcy.

Both fall under the Bankruptcy and Insolvency Act and must be administered by a Licensed Insolvency Trustee. They offer legal protection from creditors and can reduce or eliminate what you owe.

Beware of debt consultants promising “government programs” but charging fees to refer you to someone else. Go directly to a Licensed Insolvency Trustee. The consultation is free.

Learn more about debt relief programs.

Only two: consumer proposals and bankruptcy.

Both are governed by the Bankruptcy and Insolvency Act and overseen by a Licensed Insolvency Trustee. They give you legal protection from creditors, freeze interest, and provide a structured path to becoming debt-free.

Debt consolidation loans, credit counselling, and debt management plans are not government-regulated. If someone is advertising them as official government programs, walk away.

A consumer proposal is a legal process where you offer to repay only a portion of what you owe. The rest is forgiven, and your payments can be spread over five years.

You get one fixed monthly payment, legal protection from creditors, and no more interest. Debt reduction typically depends on what you owe and what you can afford.

Your payments stay the same from start to finish, even if your income goes up. You keep your assets, including your home and car in most cases. Your car loan and mortgage continue as normal.

Bankruptcy wipes out most of your unsecured debts when you can’t keep up with payments. It’s a last resort.

You surrender certain assets, though many are protected under provincial exemptions. Your credit score takes a hit. For a first-time bankruptcy, you’re discharged after 9 to 21 months.

Bankruptcy is administered by a Licensed Insolvency Trustee and governed by the Bankruptcy and Insolvency Act.

Credit counselling helps with budgeting and can set you up with a debt management plan. It’s typically offered by a certified credit counsellor through a non-profit or private firm.

A credit counsellor can help you build a budget, understand your options, and set up a repayment plan.

Be careful. Some credit counsellors are for-profit debt consultants in disguise. Ask about fees upfront and check they’re a non-profit.

A debt management plan (or debt management plan) combines your unsecured debts (credit cards, payday loans) into one monthly payment. A credit counsellor works with your creditors to reduce or waive interest, helping you repay everything you owe.

You repay in full. This is not debt forgiveness. It doesn’t offer legal protection the way a consumer proposal does, and it can affect your credit during the repayment period.

It’s a sensible route if you’re overwhelmed but still able to repay with support.

A debt consolidation loan doesn’t reduce what you owe. You borrow from a bank or credit union to pay off existing debts (credit cards, overdrafts, personal loans), leaving you with one payment at a lower interest rate.

It simplifies things and reduces missed payments. But make sure the new loan is affordable, and don’t run up more debt on the old credit cards once they’re cleared.

Debt consolidation is a tool, not a solution. Used properly, it helps. Misused, it adds more problems.

Debt settlement means negotiating with creditors to pay less than you owe, often in a lump sum. There’s no legal protection, creditors don’t have to agree, and collection efforts can continue while you negotiate.

You don’t need a debt settlement company. Many charge high fees or make promises they can’t keep.

Talk to a Licensed Insolvency Trustee first. A consumer proposal gives you similar debt reduction with legal protection built in.

Yes, debt forgiveness exists, but only in specific cases.

Creditors forgive part of your debt if you go through a consumer proposal, declare bankruptcy and meet discharge conditions, or negotiate a settlement they accept. How much depends on what you owe and your income.

Most creditors won’t voluntarily forgive debt unless they believe it’s uncollectible. Ads promising “total debt forgiveness” are almost always misleading.

Student loan debt can be included in a consumer proposal or bankruptcy if you’ve been out of school for at least seven years.

Tax debts can be included in a consumer proposal in some cases.

A Licensed Insolvency Trustee is the only professional in Canada legally allowed to file a consumer proposal or bankruptcy on your behalf and provide legal protection from your creditors.

They’re licensed by the Office of the Superintendent of Bankruptcy, part of the federal government.

No sales pitch, no upfront fees. The consultation is free. No other debt professional can file a consumer proposal or bankruptcy for you.