In this article I am going to compare and contrast two debt relief options; credit counseling and debt settlement. Credit Counseling is the most expensive debt relief option available to Canadians. In contrast, a person employing the Debt Settlement debt relief strategy has the potential to eliminate a significant percentage of their debt.
1. Description of Debt Settlement
In certain circumstances you might be able to negotiate a one-time lump sum payment to your creditor--or its authorized collection agent--for significantly less than your current outstanding balance as settlement in full.
Debt settlement is a creature of the marketplace.
It is a simple and very flexible debt relief option.
There is the potential for a person using the debt settlement debt relief option to eliminate a significant percentage of their debt.
2. Description of Credit Counseling
The credit counseling debt relief option was created by members of the creditor community.
It permits an indebted consumer to repay a minimum of one hundred percent of their outstanding debt to their creditors using monthly payments over several years.
If you wish to eliminate your debt using credit counseling then you must do so through a credit counseling agency.
Credit counseling agencies make a big deal of the fact that enrolling in a credit counseling plan with a credit counseling agency means that an individual can lower their monthly payments to their creditors.
Credit counseling agencies, however, omit to mention the fact that credit counseling is the most expensive method for eliminating debt available to Canadians.
3. When is credit counseling available?
i. Credit counseling is only available to eliminate unsecured consumer debt
Credit counseling is not available to eliminate monies owing to the government.
Credit counseling is only available to eliminate debt that is (1) consumer debt, that is (2) unsecured debt.
A consumer debt is a debt arising from a consumer transaction. Accordingly, consumer debt does not include fines or child or spousal support indebtedness.
A secured debt is a debt where the creditor has some collateral it can look to in the event of non-payment.
The two most common examples of secured debt are car loans and mortgages.
This means that you cannot use credit counseling to eliminate monies owing on a car loan or a mortgage.
ii. Creditors are not obligated to agree to have their debt included in a credit counseling
plan
If you enroll in a credit counseling plan with a credit counseling agency then your creditors are under no obligation to agree to have their debt included in your credit counseling plan.
Finance companies routinely refuse to permit their debts to be included in a credit counseling plan.
Furthermore, financial institutions might refuse to permit your debt to be included in your credit counseling plan because they they take the position that you can borrow the money to pay of the debt. This is especially the case where you have equity in your home.
4. When is debt settlement available?
i. Available to eliminate both secured and unsecured consumer debt
Debt settlement, like credit counseling, is not available to eliminate monies owing to the government.
Like credit counseling, an individual can employ the debt settlement relief option to eliminate unsecured consumer debt.
Unlike credit counseling, however, an individual can utilize debt settlement to eliminate secured consumer debt.
Accordingly, you can employ debt settlement to eliminate a debt in circumstances where your creditor has sued you, obtained a judgment against you, and placed a lien on your real property.
ii. Account must be a minimum of six months in arrears
A creditor will not entertain a one-time lump sum payment from you for less than the current outstanding balance as settlement in full unless you have not made a payment on your account for a minimum of six months.
You might have a debt in circumstances where you recently made a payment or you made a payment in the past two or three months. If you simply wait until six months have elapsed since the date of your last payment then your creditor might be prepared to entertain a settlement offer from you.
iii. Creditors are under no obligation to consider settlement offers from you
A creditor is under no obligation to entertain an offer from you where you make a one-time lump sum payment for less than the current balance as settlement in full.
iv. Settlements can only be funded by one-time lump sum payments
If your creditor is going to agree to accept a payment for less than 100 percent of the current outstanding balance then you must make a one-time lump sum payment.
Your creditor is not going to agree to accept a discounted settlement and permit you to make monthly payments.
5. What are the advantages of credit counseling?
i. Creditor protection
One of the advantages of credit counseling is some protection from those creditors who agree to have their accounts included in your credit counseling plan.
You will not receive collection calls in connection with these accounts. Nor will these creditors sue you.
ii. Reducing your total monthly payments to creditors
One of the major advantages of enrolling in credit counseling is that it will lower the size of your monthly payment to creditors each month during the life of your credit counseling plan that will last several years.
6. What are the disadvantages of credit counseling?
i. It is an inflexible debt relief option
Credit counseling is an inflexible debt relief option.
You must do credit counseling through a credit counseling agency.
ii. Credit Counseling is the most expensive debt relief option
Credit counseling is the most expensive debt relief option available to Canadians.
If you were to enroll in credit counseling today then it is going to cost you somewhere between one dollar and fifteen cents and one dollar and 30 cents to eliminate one dollar of your current debt.
Those that choose a credit counseling plan will pay some or all of the following monies:
ONE: One hundred percent of your current debt owing to your creditors.
TWO: You will also pay fees to the credit counseling agency.
Credit counseling agencies may charge as much as an additional 15 in fees.
THREE: You might be required to pay some additional interest accruing on your debt
during the life of your credit counseling plan.
Your credit counseling agency negotiates interest forgiveness with your creditors
but it cannot guarantee 100 percent interest forgiveness on each of your debts.
FOUR: You will have to repay those creditors whose debts are not included in your credit
counseling plan.
FIVE: Your credit counseling plan will not stop any existing wage garnishments.
iii. Those who enroll in a credit counseling plan cannot take advantage of the expiry of a
limitation period
Individuals who enroll in credit counseling usually have more than one debt.
You might have several debts and the provincial limitation period might have expired--or will soon expire--on one or more of these debts.
If you enroll in credit counseling then the credit counseling agency will attempt to place all of your unsecured consumer debt in your credit counseling plan.
This means that if you enroll in a credit counseling plan then you forfeit the opportunity to avoid paying a debt due to the expiry of a limitation period.
iv. Not everyone successfully completes their credit counseling plan
Since credit counseling is the most expensive method for eliminating unsecured consumer debt it might come as no surprise that a significant number of people who enroll in a credit counseling plan never successfully complete it.
7. What are the advantages of Debt Settlement?
i. Debt Settlement is a simple and flexible debt relief option.
Debt settlement is a simple and flexible debt relief strategy.
You can negotiate settlements on your own. You also have the option of hiring a debt coach or you can hire a firm to negotiate settlements on your own.
If you one unpaid account then you can offer to settle your account for 25 cents of the outstanding balance.
If your creditor--or its authorized collection agent--is not prepared to agree to a generous settlement offer then you can simply wait a few months and try again.
If you have more than one unpaid account then you can go bargain-hunting.
You can make a preliminary offer to pay each of your creditors a one-time lump sum payment of 25 percent of what you currently owe as settlement in full.
If one of your creditors is agreeable to a generous settlement offer then you can finalize the settlement with that creditor.
You can then take some time to save up some additional settlement funds and repeat this process in an attempt to obtain your second generous settlement.
You can repeat this process until all your unpaid accounts are settled.
If your debt situation deteriorates dramatically you still have the option of meeting with a Licensed Insolvency Trustee and canvassing the merits of making a consumer proposal or filing for bankruptcy.
ii. You have the opportunity to potentially eliminate a significant amount of debt
The major advantage of debt settlement over credit counseling is the amount you will pay to eliminate your debt.
When you enroll in credit counseling it might cost you somewhere between one dollar and fifteen cents and one dollar and 30 cents to eliminate one dollar of your debt. In contrast, if you use debt settlement you might eliminate your debt for as little as 25 cents on the dollar. This means that you might pay more than five times more money eliminating your debt using credit counseling compared with debt settlement.
iii. You will not forfeit the opportunity to take advantage of a limitation period.
When you utilize debt settlement as a debt relief option you can take a two-prong approach.
Firstly, you can try and negotiate favourable lump sum settlements with your creditors.
Secondly, you might find yourself at some future date that you can take advantage of the expiry of a limitation period.
If the limitation period on your debt expires then you will find yourself in an attractive position.
If your creditor has not sued you before the expiry of the limitation period then you have the option of not paying a penny to your creditor.
The expiry of a limitation period might also mean that your creditor is more motivated to agree to a generous settlement because the creditor's bargaining position has been weakened.
If you want to learn more about limitation periods then you might want to watch the following YouTube video.
In this YouTube video I explain how an individual can avoid paying certain debts due to the passage of time and the expiry of a limitation period.
8. What are the disadvantages of Debt Settlement?
i. Your credit score will suffer
If you do not pay a creditor for six months then you should anticipate that your credit score will be adversely affected.
Your credit score will also be adversely affected if you enroll in a credit counseling plan.
ii. You should anticipate receiving collection calls
If you have made a payment to your creditor in several months then you should expect that you will receive collection calls.
You might want to learn more about how to avoid collection calls by watching the following YouTube video titled "How Can I Avoid Collection Calls?".
In this YouTube video I describe several ways that a person can avoid collection calls.
iii. You might be sued
If have not made a payment to your creditors for several months then there is chance that you might be sued.
You might be interested in watching a YouTube video addressing the odds of being sued by a creditor.
In this YouTube video I provide some insights on the issue of whether or not your creditor will sue you.
I have published a YouTube video titled "Credit Counseling VERSUS Debt Settlement.
In this YouTube video former collection agency lawyer and author Mark Silverthorn compares two debt relief options; credit counseling and debt settlement.
I felt so strongly about educating the public about credit counseling that I hired a professional film crew and shot a video in Toronto titled "Is Credit Counseling For Suckers?"
I hope that anyone considering enrolling in a credit counseling plan with a credit counseling agency will first watch this YouTube video titled "Is Credit Counseling For Suckers?"
If your goal is to identify the optimal method for eliminating your debt then it is important that you compare the debt relief options that are available to you.
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