Consolidating with Debt Settlement
Consolidating debt by borrowing from friends and family can be a good option.
Consolidate by Doing a Debt Settlement
Up until October of 2010 Canadian debt settlements were primarily done in only one way. If you were having extreme difficulty paying your credit card debts and you happened to receive a large chunk of cash from somewhere, you could contact your creditors and offer to settle your debt with them for less than your full balance if they would accept a lump sum payment. If your creditor thought that this was a better option than waiting for you to completely pay them back, they might accept your offer and you might repay only 50% – 80% of your debt.
Anyone can call up their creditors and try to settle their debts in this manner but are unlikely to succeed. The most successful approach is to work with a credit counselling organization. They know what your creditors are likely to accept and what they won’t even consider. Because most people don’t have a rich uncle or a Fairy Godmother to lend them the money necessary to settle their debts, this isn’t a realistic option for most people.
American Companies Offering Debt Settlement Services
However, in October of 2010 Canada was introduced to a sensational new way of settling credit card debt that “could work for anyone”–or so the advertisements claimed. All you have to do is stop paying your creditors, save up your own money and then have an “expert negotiator” work out a settlement for you. Unfortunately, this method doesn’t really work–even though American debt settlement companies spend millions of dollars advertising that it does work.
After fielding thousands of complaints from angry US consumers and thoroughly investigating the matter, the US government enacted legislation in October 2010 to prevent for-profit US debt settlement companies from charging people fees for debt settlement services before providing a debt settlement service.
These American for-profit companies were charging people many different types of fees on a monthly basis for a service that 65% of their clients never received. The US Federal Trade Commission went on to discover that less than 10% of the people who signed up for these for-profit settlement programs successfully completed them, and rather than save their clients money as they so heavily advertise, they often cost many of their clients two to three times the amount of the debts that they settled. This is because it takes so long to save for a settlement that credit card interest, late fees and penalties often doubled or tripled the debt by the time it was settled.
Collections agencies become involved
To make matters worse for those who signed up for these programs, creditors would not stand by and wait while they skipped their monthly payments. They would naturally escalated their collections activities. This could include sending the debt to a collection agency, taking the client to court, seeking a judgment against the client and then garnishing the client’s wages or putting a lien on their house.
Unfortunately, many of these US debt settlement companies are now advertising in Canada and are signing Canadians up for these disastrous for-profit programs that are now illegal in the United States.
Most Canadian non-profit credit counseling organization are very successful with negotiating debt settlements for the simple reason that they will not agree to negotiate unless the situation makes sense. All organizations charge a percentage of the settlement amount as a fee to pay for their service.
Interest Rates for doing a Debt Settlement
Once a creditor agrees to a settlement amount and you pay it by their settlement expiry date no more interest or fees are charged. The debt is then legally paid in full (as long as you have this in writing). Debt settlements can range from less than 20% to over 80%. It all depends on the situation. Someone who has become disabled and cannot work again or has suffered a debilitating illness would be an ideal candidate for a debt settlement. However, someone who is just trying to take advantage of their creditors doesn’t stand a chance.
Advantages of using a Debt Settlement
- Potentially repay far less than you owe and quickly eliminate your debts
- Your credit can be completely repaired 2 years after your settlement is complete if you work with a non-profit organizationa
Disadvantages of using a Debt Settlement
- Need to have a lump sum of money available to settle. If you don’t have a rich uncle or a Fairy Godmother, then this option is usually off the table
- For-profit debt settlement services have less than a 10% success rate and 65% of their clients do not receive any service in return for the fees that they pay according a US Federal Trade Commission study
- Your credit will be negatively impacted by a debt settlement. Your credit will take 6 – 7 years to recover if you work with a for-profit debt settlement company
Canada’s Other Debt Consolidation Options
- Consolidate using a Debt Consolidation Loan
- Consolidate using a Home Equity Loan / Refinance Mortgage / Second Mortgage
- Consolidate using a Line of Credit or Overdraft
- Consolidate debt on your Credit Cards
- Consolidate using a Debt Management Program
- Consolidate by doing a Debt Settlement
- File a Consumer Proposal
- Consolidate by Borrowing from Family or Friends
Why Talk to Creditors?
When you’re in debt, your creditors can help you. But communicating with them effectively is key.
Debt Settlement Dangers
Working with a for-profit debt settlement company can cost you. Here’s what to watch out for.
Debt Settlement Scams
If something sounds too good to be true it usually is. Here’s how to spot a debt settlement scam.