You might be experiencing problems paying your bills. Furthermore, you might be interested in eliminating your debt without resorting to personal bankruptcy. You might also have reached the point where you can no longer deal with your debt situation by borrowing additional monies!
If you find yourself in this position then you might very well have three options, credit counselling, settling your debt on your own, or making a consumer proposal. If you were to choose credit counselling then, with respect to your current indebtedness, you would repay your unsecured consumer creditors 115 cents on the dollar by making monthly payments over a period not to exceed five years—not a particularly attractive option except in two very limited circumstances!
If you want to eliminate your debt, and you want to eliminate your debt at substantial discounts—and you have rejected personal bankruptcy as an option—then you are left with two remaining options (1) making a consumer proposal or (2) settling your debt on your own.
The purpose of this blog is to compare the relative merits of resolving your outstanding debt situation by settling your debt on your own and making a consumer proposal. When I refer to “settling your debts on your own” I do not mean hiring a firm to settle your debts for you. This blog will explain what is involved if you were to make a consumer proposal as well as describe how you can settle your debts on your own.
Insights from a collection industry insider
I am uniquely qualified to write this blog. For twelve years I worked as a collection lawyer for four of the ten largest collection agencies operating in Canada. During this period I managed the Legal Department at some of these agencies. I spent two years researching and writing a book canvassing a consumer’s options for dealing with consumer debt, The Wolf At The Door: What To Do When Collection Agencies Come Calling (2010), published by McClelland & Stewart. Furthermore, over a four-year period I personally negotiated hundreds of settlements on behalf of Canadians.
Over the past six years I have provided advice to hundreds of consumers across Canada experiencing debt problems. Consequently, a number of my friends refer to me as “the debt doctor”. I have suggested to some of the Canadians calling me for advice that they speak to a bankruptcy trustee. In other cases I have provided practical advice on how to deal with collection agencies or how to negotiate a favourable settlement. In some instances I have informed consumers that they might want to consider taking advantage of a limitation period to avoid paying a debt altogether.
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A look under the hood with consumer proposals and settling debt on your own
Settling your debt on your own and making a consumer proposal are two options for resolving your debt situation. These two options, however, might not be your only options for eliminating your debt. To learn more about all of your debt resolution options click here.
When you visit the doctor because of a health problem the doctor is going to diagnose your medical condition, review potential solutions, and recommend a particular course of treatment. In a similar fashion, before I can advise you on your choice between making a consumer proposal and settling debt on your own I need to help you diagnose your debt problem, review the advantages and disadvantages of each course of action available to you, and recommend the optimal debt resolution option for you. Choosing the optimal debt resolution option for you is going to depend upon several important factors which I am going to set out for you in the remainder of this blog.
Ideally, when choosing between making a consumer proposal and settling your debts on your own you should address the following nine questions:
1. What is involved in making a consumer proposal?
2. What is involved in settling your own debt?
3. Under what circumstances are these two debt resolution options available?
4. When is a fair head-to-head comparison between these two options possible?
5. What are the advantages of a consumer proposal?
6. What are the disadvantages of a consumer proposal?
7. What are the advantages of settling your own debt?
8. What are the disadvantages of settling your own debt?
9. What are four good reasons for making a consumer proposal?
What is involved in making a consumer proposal?
In order to successfully make a consumer proposal it is necessary for you to jump through a number of hoops—more specifically, the following four hoops:
1. you must meet in person with a bankruptcy trustee
2. you must complete a document containing details with respect to all your debts
3. your bankruptcy trustee will make a proposal which must be approved by your creditors
After you decide to make a consumer proposal your bankruptcy trustee will make a proposal to your creditors. This proposal will set out the percentage of your debt that you are going to repay, the payment period—not to exceed five years—and the amount of your monthly payment.
The trustee will file your consumer proposal with the Office of the Superintendent of Bankruptcy and submit it to your creditors. Your creditors have 45 days to accept or reject your consumer proposal.
Your creditors have the right to vote on whether or not to accept your consumer proposal. In order to have your consumer proposal approved you need a simple majority vote of fifty percent plus one. Each one of your creditors is entitled to one vote for each dollar of debt owing to that creditor. This means that if you owe more than fifty percent of your total debt to one creditor then that creditor will have a veto when it comes to the approval of your consumer proposal. If a simple majority of the votes cast is in favour of your consumer proposal then all of your creditors are bound by the result.
4. you must make monthly payments over a period of three to five years equal to about thirty-five percent of your indebtedness
The fact that your consumer proposal is approved by your creditors is no guarantee that you are going to eliminate your debt for approximately thirty-five percent of what you owe to your creditors, excluding secured creditors and non-dischargeable debt. It is necessary for you to make your monthly payments on a regular basis over the life of your consumer proposal. In the event that you become 90 days in arrears on your consumer proposal–fail to make three consecutive monthly payments to the bankruptcy trustee–then your consumer proposal is annulled. In that scenario, you are entitled to credit for any payments that you have made but you are no longer entitled to the protection from your creditors afforded to you under the consumer proposal.
What is involved in settling your debt on your own?
You will be in a position to settle an unsecured consumer debt as soon as you have not made a payment on it for a minimum of six months—and not a day sooner! There are two different scenarios where you might find yourself in this position. Firstly, simply by default. Over the past several months you could not afford to make the minimum monthly payments on one or more of you accounts—typically credit cards, personal loans, lines of credit, and often utility bills, telephone, cable television, and internet service providers. Secondly, by design. You have made a conscious decision to settle your debts on your own, you select those debts you no longer are going to pay, and you proceed with your plan to settle your debts on your own.
The fact that it is possible to settle an unsecured consumer debt which is more than six months old does not mean that your creditor, at any particular point in time, will agree to settle it or agree to settle it for a generous amount. Creditors and their authorized collection agents are trying to maximize their financial return when attempting to collect an unpaid account. They would much prefer to recover 100 percent of the outstanding balance compared to 50 percent or 25 percent. They would prefer, however, to recover 30 percent than nothing at all when it comes to your outstanding account!
Collectors are trained to try and obtain payment in full during their initial contacts with a debtor. Do not be surprised when you are speaking with a representative from your creditor or their collection agent that you are told that “we won’t accept anything other than payment in full”. In response to this whopper you can politely suggest to the creditor’s representative that it contact you at some future date if your creditor should become interested in discussing a discounted settlement for a one-time lump sum payment!
The fact that your account is unpaid means that your creditor might choose to sue you. The fact that your creditor sues you, however, does not mean that your creditor will refuse to discuss a potential settlement with you. If your creditor has sued you then you will likely be in a much weaker bargaining position negotiating a settlement.
A settlement might arise where the creditor or the creditor’s authorized representative contacts you—verbally or in writing—and suggests to you that it might be prepared to settle your account provided you make a one-time lump sum payment. A settlement might also arise where you initiate contact with your creditor or your creditor’s authorized representative and, either verbally or in writing, make a settlement offer.
When you want to settle your debt on your own it is important to keep the following rules in mind when communicating with your creditor or its representative:
Never admit legal liability for the debt in writing
Inform your creditor or their representative—either verbally or in writing–that you are prepared to settle a specific account by making a one-time lump sum payment for either (i) a specific dollar amount, or (ii) a payment equal to a specified percentage of the current outstanding balance
You can negotiate with your creditor—haggle like you are at a bazaar on your vacation
That you will not consider settling any account until such time that you are in possession of a written settlement letter from your creditor or your creditor’s authorized representative confirming the details of the settlement before you are prepared to make any settlement payment
If you do, in fact, settle an account then it is very important that you retain for your records any and all documents associated with the settlement including the settlement letter, your proof of payment and a receipt for your payment.
There are three different scenarios regarding potential settlements at any particular point in time:
Your creditor will not consider a potential settlement
Your creditor will consider a settlement on the condition that you provide certain documentation confirming your financial situation
Your creditor will consider a settlement without asking for any documentation regarding your financial situation
In some instances your creditor might only be prepared to consider a settlement where it is satisfied that you are experiencing financial hardship and the odds are remote that it will ever recover the entire balance owing. In this scenario your creditor will ask for documentation which will satisfy it that you are experiencing financial hardship. This will often include a request for copies of your T4s from recent taxation years, a copy of your most recent paystub from your employer, and possibly the completion of a one or two-page form, provided by your creditor, in which you list your assets, liabilities, monthly income and monthly living expenses.
Settling an outstanding account for a one-time payment for an amount less than one hundred percent of the outstanding balance can be relatively straightforward. What can be much more challenging, however, is how close you can get to obtaining the best possible settlement! There is a big difference between settling your outstanding $10,000 credit card bill for $8,000 and $2,000!
I spent approximately four years negotiating settlements on behalf of hundreds of consumers. My goal was to obtain the best possible settlement—typically somewhere around twenty-five percent of the outstanding balance. From time to time I was able to settle accounts for amounts between 10 percent and 20 percent of the outstanding balance. In those instances where I was negotiating a settlement where my client had been sued my goals were settlements closer to 70 to 80 percent of the outstanding balance. I share my insights about negotiating favourable settlements in my book The Wolf At The Door: What To Do When Collection Agencies Come Calling (2010), published by McClelland & Stewart.
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Under what circumstances are these two debt resolution options available?
Before we can make a fair comparison of these two debt resolution options it is important to know under what circumstances these two debt resolution options are available. The following four factors come into play:
The types of debts which can be eliminated
The dollar amount of debt which can be eliminated
Whether or not you can pick and choose the debts you want to eliminate
When can you attempt to resolve your debts using these two options?
1. Consumer Proposal vs Debt Settlement: Types of debts which can be eliminated
The following chart lists five distinct categories of debt and which debt categories can be eliminated by settling a debt on your own or by making a consumer proposal.
Types of Debt Which Can be Eliminated
Using a Consumer Proposal or Settling debt on your own
Type of Debt
Consumer proposal
Settling debt on your own
Secured Debt
Non-Dischargeable Debt
Unsecured consumer debt
X
X
Monies owing to government
X
Student loan debt
X
sometimes
Secured debt is debt in which your creditor has collateral in the event you owe money to your creditor. The two most common examples of secured debt are mortgages on real property and liens arising from the purchase or lease of an automobile. As a general rule, any debt which is not secured debt is unsecured debt. There are different types of unsecured debt. Some unsecured debt can be described as consumer debt. This would include monies owing on most, but not all credit cards, lines of credit, and personal loans (excluding student loans) as well as monies owing to utilities—companies which provide cable television, internet and telephone services. Non-dischargeable debt includes certain types of debt which cannot be eliminated by “settling on your own” or by making a consumer proposal or bankruptcy. These debts include monies owing for child support or spousal support, government fines, as well as civil judgments against a debtor involving fraud.
In summary, “settling debts on your own” is only available in connection with resolving unsecured consumer debt, and it might or might not be available for eliminating student loan debt. In contrast, if you choose to make a consumer proposal then, if successful, you would be in a position to resolve your debts—including monies owing to the government, outstanding student loans, and unsecured consumer debt–for approximately thirty-five percent of your indebtedness at the time you make your consumer proposal.
2. Consumer Proposal vs Debt Settlement: Dollar value of debts which can be eliminated
If you want to eliminate your debt by negotiating a one-time lump sum payment with a creditor for less than one hundred percent of the outstanding balance then there are no restrictions in connection with dollar amounts.
In contrast, if you owe less than $10,000 to your creditors then you are likely not going to be able to eliminate that debt by making a consumer proposal. You should expect that bankruptcy trustees will decline to do a consumer proposal if you owe less than $10,000 to your creditors. Furthermore, a consumer proposal is not available if you owe more than $250,000 to your creditors, excluding monies owing on your mortgage. If you do owe more than $250,000 to your creditors, excluding your mortgage debt, then you might want to talk to a bankruptcy trustee about a Division 1 Proposal which is similar to a consumer proposal.
3. Whether or not you can pick and choose debts to be eliminated
It is possible that you want to eliminate a debt and you only have one outstanding account. That situation, however is not very common. In most instances where people have an outstanding account they owe monies to more than one creditor. The remainder of this section assumes that you have more than one outstanding debt.
A Consumer’s Ability to Cherry Pick the Accounts They Want to Resolve
Consumer proposal vs Settling debts on your own
Consumer proposal
Settling debts on your own
If you make a consumer proposal then it is necessary for you to include each and every one of your debts in the following debt categories in your consumer proposal:
Unsecured consumer debt
Monies owing to the government
Student loans
If you choose to settle your debts on your own then you have total flexibility when it comes to choosing which of your unsecured consumer debts you want to settle (and possibly one or more student loans)
Depending upon your particular situation, the fact that it is necessary to include all of your debts—excluding secured debt and non-dischargeable debt—in your consumer proposal might be a major disadvantage. This issue will be explored in more detail later in this blog.
4. When can you resolve your debts using these two options?
a. When can you settle your unsecured consumer debts on your own?
If you have an unsecured consumer account that has been unpaid for more than six months there is a chance that your creditor might be willing to accept a one-time payment equal to less than one hundred percent of the outstanding balance as settlement in full. If, however, you have made a payment on your account anytime in the past six months then the odds are remote that your creditor will consider accepting any payment from you other than payment in full to resolve your account.
It is important to appreciate the fact that, at no time, does your creditor have a legal obligation to negotiate some kind of discounted settlement with you. In fact, if your account is unpaid then your creditor has the right to sue you, although the fact that a creditor sues a debtor is no guarantee that a creditor will recover any monies from a debtor. You should also be aware that if a creditor were to sue you, then it might still be possible to negotiate a discounted settlement. You are, however, in a much better bargaining position if at the time of the negotiations your creditor has not sued you.
b. When can you make a consumer proposal?
Unlike settling debts on your own, if you want to make a consumer proposal there is no requirement that your debt be unpaid for a minimum of six months! There are, however, a number of conditions which you must satisfy before you can make a consumer proposal.
In order to make a consumer proposal it is necessary for a consumer to meet with a bankruptcy trustee in person. Before a trustee will permit a consumer to make a consumer proposal the bankruptcy trustee will determine whether or not the consumer is “insolvent” as defined under the federal Bankruptcy and Insolvency Act.
You are insolvent if you meet two conditions. Firstly, you are unable to pay your financial obligations as they become due. Secondly, the total dollar amount of your debts must be greater than the total dollar amount of your assets. Virtually everyone meeting with a bankruptcy trustee will satisfy the first condition. A significant percentage of people, however, will not meet the second condition because they have substantial equity in their home. In many instances an individual could pay all of their outstanding debts if they were to simply sell their home and use the proceeds from the sale to pay off their debts.
When is a fair head-to-head comparison between these two debt resolution options possible?
It is simply not accurate to suggest that one of these two debt resolution options—making a consumer proposal or settling your debt on your own—is superior to the other. However, depending upon your particular circumstances it is possible to say that:
one or both options might be available to you
one option might be particularly attractive to you because of one or more factors
If one hundred percent of the debt you want to eliminate is unsecured consumer debt then the choice between making a consumer proposal and settling debt on your own is an apples to apples comparison. If, however, you want to eliminate both unsecured consumer debt and monies owing to the government then we are no longer comparing apples to apples—but an apples to oranges comparison–because you can only settle unsecured consumer debt and not monies owing to the government. If you want to eliminate a significant amount of debt owing to the government then this factor might be a key consideration tipping the scales in favour of you making a consumer proposal.
What are the advantages of a consumer proposal?
There are seven advantages to making a consumer proposal.
1. All lawsuits against you involving unsecured creditors will be stayed or terminated
If you make a consumer proposal that is approved by your creditors then any and all lawsuits against you—in connection with monies owing to certain creditors—unsecured consumer debt, monies owing to the government and student loan debt—will be suspended so long as you make your monthly payments under your consumer proposal. Making a consumer proposal does not prevent your secured creditors from using the courts to realize upon their security.
Making a consumer proposal can be very helpful if you own real property in your own name, you have equity in the property—and you are sued for a significant amount of money. In the event your creditor were to obtain a judgment against you it could place a lien on your property. This would effectively transform your unsecured creditor into a secured creditor.
By making a consumer proposal before your creditor obtains a judgment against you this creditor—as well as the other creditors included in your consumer proposal–will receive approximately 35 cents on the dollar. In contrast, if you were to make a consumer proposal after your creditor were to obtain a judgment against you then this particular creditor, now a secured creditor, would usually obtain more than 100 cents on the dollar—the amount of your creditor’s judgment would be inflated by court costs, pre-judgment interest and post-judgment interest, and the latter could be substantial!
2. All wage garnishments against you will be terminated
If you make a consumer proposal which is accepted by your creditors then all of the wage garnishments against you will end except for those involving child support and spousal support.
3. All collection activity against you will cease
If you make a consumer proposal then any and all collection activity against you involving unsecured consumer debt, monies owing to the government, and student loan debt will cease. Please note that making a consumer proposal does not prevent your secured creditors from attempting to recover monies from you.
4. Eliminate monies owed to government and most unsecured debt for 35 cents on the dollar
One of the key advantages of making a consumer proposal is that you will be in a position to eliminate your indebtedness for (1) monies owing to the government, (2) most unsecured debt, and (3) student loans by paying an amount equal to thirty-five percent of your indebtedness, through monthly installments, over a period of three to five years.
You are not able to eliminate any debt owing to your secured creditors or non-dischargeable debt when you make a consumer proposal. If you make a consumer proposal your ability to eliminate this debt is not guaranteed and it depends upon your ability to make your monthly payments during the life of your consumer proposal which are typically between three and five years in length.
5. No additional interest accrues on your outstanding debt
Another advantage of making a consumer proposal is that interest stops accruing on your outstanding debt. If, however, you fail to make three consecutive monthly payments on your consumer proposal then it is annulled and your interest will continue to accrue.
6. You have the option of eliminating your debt with a lump sum payment if you can source the necessary funds
If creditors approve a consumer proposal then typically the consumer will make fixed monthly payments over a period of three to five years under which the consumer pays an amount equal to approximately thirty-five percent of their indebtedness at the time the consumer proposal is made. In some circumstances, however, an individual making a consumer proposal might find himself in a position where he can source monies–from friends or family, or a financial windfall such as an inheritance–enabling him to “pay out” a consumer proposal by making a one-time lump sum payment. A consumer who is able to do so will be able to repair his credit rating much sooner and have access to credit as soon as his consumer proposal is paid out.
7. A consumer proposal is a known commodity
One of the advantages of making a consumer proposal is the certainty associated with it. It is a debt resolution option tailored for someone who is uncomfortable taking risks.
If you make a consumer proposal to your creditors then the odds are good that it will be accepted provided your offer is to repay approximately thirty-five percent of your indebtedness. Once your consumer proposal is approved then your results are guaranteed provided you successfully make your monthly payments during the life of the consumer proposal. Furthermore, collection activity will end, legal proceedings and wage garnishments will stop as long as you make your monthly payments.
What are the disadvantages of a consumer proposal?
If you choose to make a consumer proposal to your creditors then you might have to deal with one or more of the following six potential disadvantages:
1. A very formal, highly structured process, lacking in flexibility
Making a consumer proposal is a formal process. It is necessary to meet with a bankruptcy trustee in person. You must provide the bankruptcy trustee with a list of the names of all of your creditors and the amounts owing to them. Your creditors have the right to vote on whether or not to accept your consumer proposal and in some cases they vote against approval. In the event that your creditors approve your consumer proposal then you must make monthly payments. In the event that you fail to make three consecutive monthly payments then your consumer proposal is annulled.
2. You must be able to make regular monthly payments to the bankruptcy trustee
If your creditors approve your consumer proposal then it is necessary for you to be able to make monthly payments over a number of years, typically between three and five years. This requirement makes it difficult for debtors who do not receive a regular paycheque–sales people working on 100 percent commission, individuals with seasonal employment, and those experiencing periods of unemployment.
3. You must include all of your debts in a consumer proposal
When you make a consumer proposal it is necessary to include all of your debts—excluding secured debt and non-dischargeable debt—in your consumer proposal. In many instances this might not be a problem. But sometimes it can be. If you list a loan from your employer or your family members then they will be notified of the fact that you have made a consumer proposal and they will learn that they will be required to take a major haircut in terms of monies repaid to them. Furthermore, if you make a consumer proposal you do not have the option of excluding one of your credit cards or one of your lines of credit from the consumer proposal.
4. You will never be able to resolve your outstanding debts for less than 30 cents on the dollar
If you make a consumer proposal then you will not be in a position to take advantage of the expiry of a limitation period to avoid paying monies to your unsecured consumer creditor. This might be the single most important disadvantage of making a consumer proposal. If you owe monies to an unsecured consumer creditor and it does not sue you prior to the expiry of the relevant limitation period in your province then you will be able to avoid paying a penny to that creditor.
If you eliminate your debt by making a consumer proposal then you will be effectively eliminating your debt for approximately 35 cents on the dollar on the condition that you make your monthly payments for the life of your consumer proposal—typically between three and five years. If you default on your consumer proposal you are looking at paying 100 cents on the dollar or more—and potentially bankruptcy!
In contrast, if you were to avoid paying your debt by relying upon the expiry of a limitation period then the cost of resolving that debt is zero cents on the dollar. I should point out that your debt is not extinguished if a limitation period expires and your creditor could still demand payment from you. In the unlikely event that your creditor were to sue you after the expiry of a limitation period then you could file a defence with the court pleading the expiry of a limitation period as a full and complete defence and your creditor would lose its lawsuit.
5. Not entitled to have access to credit during your consumer proposal
If you make a consumer proposal then you will not be entitled to have access to credit during the life of your consumer proposal, typically between three and five years in length. This means that you will not be able to have a conventional credit card, personal loan, or line of credit. Many people who contemplate making a consumer proposal, who can afford to do so, will try to buy an inexpensive used car prior to making a consumer proposal. Making a consumer proposal does not prevent you from having a pre-paid credit card which is virtually identical to a credit card except the credit card company does not extend any credit to you—you must put money on the card before using it to make purchases.
6. The fact that your creditors approve a consumer proposal is no guarantee that you are going to successfully eliminate your debt
If your creditors approve your consumer proposal there is no guarantee that you will be able to eliminate your debt for approximately 35 cents on the dollar. It is necessary for you to make your monthly payments over the life of the consumer proposal. Your consumer proposal will be annulled if you fail to make three consecutive monthly payments. It has been estimated that about one in four Canadian consumers do not successfully complete their consumer proposal.
What are the advantages of settling your own debt?
I have identified ten advantages of settling your own debt:
1. A very informal flexible debt resolution option
Unlike a consumer proposal, settling your own debt is a very informal flexible option for resolving one or more of your unsecured consumer debts. There is no requirement that you meet in person with anyone before you can settle your debts. Nor is there a requirement that you must be insolvent. Finally, there is no requirement that you (i) owe a minimum of $10,000 or (ii) owe less than $250,000 to your creditors, excluding mortgage debt, before you can settle your debts on your own.
2. You can pick and choose which debts you want to resolve using this method
If you choose to settle your own debts then you can cherry pick how you wish to deal with your various debts. A person who has a loan from their employer will typically want to repay that loan in full. In contrast, you might choose to resolve your outstanding credit cards by either negotiating a one-time settlement for less than the entire balance owing or avoid paying the debt altogether by waiting for the expiry of a limitation period.
3. You have flexibility as to when you want to resolve debts using this method
If you choose to resolve one or more unsecured consumer debts by settling your debt on your own then you can simply wait and contact your creditors from time to time until such time that a favourable settlement is available. If you have accumulated a few hundred or a few thousand dollars in savings which can be used for potential settlements you can contact each one of your creditor’s representatives and determine which creditor is able to offer you the most generous deal on a potential settlement at that time.
4. There is no requirement that you make monthly payments
Unlike a consumer proposal, if you settle your debt on your own there is no requirement that you make monthly payments over a period of 36 to 60 months. This can be a major advantage for people who do not earn a regular paycheque, persons with low incomes, or individuals experiencing unemployment on a regular basis. Ideally, if you are not making monthly payments to your creditors you might be able to afford to set aside monies on a regular basis to put in your debt settlement war chest.
5. Ideal for debtors in dire financial straits
If you are in dire financial straits then settling your debts on your own might be preferable to making a consumer proposal because, as a practical matter, you simply could not afford to make the required monthly payments over the next three to five years necessary under a consumer proposal. In my book The Wolf At The Door I introduce two debt settlement strategies–Silverthorn Max and Silverthorn Lite–which might be ideal for those who cannot afford to make the monthly payments over a 36-month to 60-month period as required under a consumer proposal. These two strategies might be very attractive to the following individuals:
Those experiencing substantial difficulties paying for the basic necessities of life
Persons whose wages are not subject to a garnishment order
Consumers who do not own real property in their own name
Persons owning real property in their own name but have not been sued
6. You have the potential to resolve your outstanding accounts at zero cents on the dollar
The Silverthorn Max debt settlement strategy focuses on financial survival. The number one priority for a person using the Silverthorn Max debt settlement strategy is to pay for the necessities of life—shelter, food, clothing, healthcare, and transportation—first, and then, and only then, to try saving monies to be used to fund future settlements with creditors.
When it comes to eliminating your debt the passage of time can be your best friend. Firstly, the longer your debt remains unpaid, typically the more generous your creditor might be prepared to be negotiating a settlement. Secondly, during the period you are not making payments to certain creditors you should be trying to accumulate monies which can be used to fund a one-time settlement. Finally, if your creditor does not sue you on your unsecured consumer debt before the expiry of the limitation period in your province then you will be in a position to make a decision to cease any and all efforts to settle that account. In this scenario, you have effectively resolved this outstanding debt at no cost to you! The relevant limitation period for unsecured consumer debt in British Columbia, Alberta, Ontario, and New Brunswick is two years, three years in Quebec, and six years in the rest of Canada.
7. You might be able to settle your debt for as little as 20 cents on the dollar
When using the Silverthorn Lite debt settlement strategy a consumer does not make payments to selected creditors and makes efforts to set aside monies to fund future settlements—preferably by putting aside monies each month into their debt settlement war chest. At some point you might have set aside enough monies that you can make a settlement offer—25 percent of the current outstanding balance—on your debt with the lowest balance.
If you decide to settle your debts on your own then there is no rule as to what is the best possible settlement available from a particular creditor. There is always the possibility that your creditor might decline to discuss a settlement at any given time. You might be sued in which case a settlement might still be possible but you will be in a much weaker bargaining position. Some creditors are more generous than others when it comes to settling outstanding accounts.
To learn more about how you can obtain the best possible settlements available you might want to obtain a copy of my book The Wolf At The Door: What To Do When Collection Agencies Come Calling (2010), available as an e-book on www.amazon.com.
8. It is an ideal strategy for those with unsecured consumer debt who are never sued
Based upon my experience as a collection industry insider it never ceases to amaze me how few consumers with unpaid accounts are actually sued! When researching my book The Wolf At The Door several senior people in the collection industry confirmed that collection agencies, as a group, only sue about one in 10,000 accounts assigned to them for collection on a commission basis! Click here to learn more about why your creditor might never sue you.
A person who successfully uses the Silverthorn Lite debt settlement strategy might find themselves in a great position if they are not sued by their creditors. If you do not pay an unsecured consumer debt and your creditor does not sue you before the expiry of the relevant limitation period then you have two options. Firstly, you can try and negotiate a favourable settlement. Alternatively, you can choose not to make any payments to your creditor, nor to settle your outstanding account, in which case you have effectively resolved your debt for zero cents on the dollar!
If you are able to take advantage of the passage of time, patience exploring potential settlements with your creditors, some knowledge about limitation periods, a little bit of luck, and possibly some tips from myself you just might be able to save thousands, and possibly tens of thousands of dollars eliminating your debt!
9. If your situation changes at some future date you can simply switch to another debt resolution option
One of the advantages of settling your debt on your own is that if circumstances change substantially—typically where one or more creditors were to sue you—then you still have the option of trying another debt resolution option—likely a consumer proposal, or potentially personal bankruptcy. The fact that your initial course of action was to try and settle your debt on your own does not later prevent you from making a consumer proposal.
10. Settling your own debt does not bar you from having access to credit
The fact that you want to settle one or more of your debts does not prevent you from having credit. It is quite common for people who want to settle their debts to stop making payments on all but one or two of their existing credit cards or lines of credit. This strategy enables a consumer who wants to settle their debts on their own to have access to some credit. You should be aware that if you have one or more accounts which have not been paid in more than six months then you should not be able to successfully apply for credit.
What are the disadvantages of settling your own debt?
I have identified seven potential disadvantages for a person who wishes to settle their own debt.
1. You might require advice or assistance
As you are reading this blog you might not feel that you know enough to be able to settle your debt on your own. If you find yourself in this position you might want to do one of the following:
Read a book or an article on the subject written by an expert on the topic
Hire someone who is an expert on the subject to provide you with advice on a fee-for-service basis
Hire someone to represent you and settle your debts on your behalf
In my book The Wolf At The Door: What To Do When Collection Agencies Come Calling (2010), published by McClelland & Stewart, I provide a significant amount of advice for Canadians wanting to settle their debts on their own. This book is available as an e-book on amazon.com.
2. You might be adverse to taking risks
Settling your debt on your own is not for everyone! It is a debt resolution option best suited for risk-takers and not for those uncomfortable taking risks. Settling debt on your own will typically mean that you will receive payment demands from creditors and collection agencies. There is a risk that you might be sued or that you might not be able to negotiate a favourable settlement.
3. No settlements are available until your debts remain unpaid for a minimum of six months
Your creditors will refuse to discuss a potential settlement with you until such time that your account has not been paid for a minimum of six months. If you are currently making payments to a creditor in connection with a particular account and you wish to settle this account then it will be necessary for you to stop making payments on that account.
4. Interest will typically continue to accrue on your outstanding account
As a general rule, if you stop making payments to a creditor on an unsecured consumer debt interest will continue to accrue on your account. Some creditors, however, freeze a consumer’s outstanding balance—and stop charging interest on an outstanding account—once the account has not been paid for six months. If you are able to settle your outstanding account for 25 percent to 50 percent of the outstanding balance eighteen months after you stop making payments then the fact that interest continues to accrue on your outstanding account should not be a significant disadvantage to settling debts on your own.
5. You should anticipate collection calls and collection notices
If you owe monies to your creditors then you should expect to receive demands for payment—both in writing and by telephone. The first six months that your account is unpaid your creditor will typically use its in-house collection department to collect monies owing. Once your account has been unpaid for six months your creditor will make a decision to do one of the following:
Continue with collection efforts using in-house collection department
Assign your account to a collection agency for collection on a commission basis
Sue you
Sell your account
Many consumers are overwhelmed by collection calls. In fact, there are a number of things that a consumer can do to stop or avoid collection calls, or minimize their impact!
6. Your creditor might sue you
If you owe money to a creditor then your creditor might choose to sue you. The fact that your creditor has sued you does not mean that you cannot negotiate a settlement. I can recall representing a debtor who had been sued by a major chartered bank for $10,000. I called the lawyer representing the bank and asked him not to seek a default judgment against the debtor without giving me two weeks’ prior notice because I wanted to explore a potential settlement. Later that month I was able to negotiate a settlement for a lump sum payment of $8,000.
The fact that your creditor sues you does not prevent a potential settlement. Once a creditor sues a debtor, however, the debtor is in a much weaker position than if the creditor had not sued the debtor.
7. You might not be able to negotiate a favourable settlement
If you do not pay your outstanding unsecured consumer debt your creditor is under no legal obligation to negotiate a settlement with you. However, if a creditor is not prepared to sue you and they are not prepared to negotiate a settlement with you then they run the risk of not recovering any monies from you.
There are several factors which will make it more likely that your creditor will (i) negotiate a settlement with you, and (ii) negotiate a more generous settlement with you.
The longer your debt remain unpaid, typically the more generous the settlements which are available
If you can demonstrate financial hardship your creditor will typically be more inclined to agree to a more generous settlement
If you are in a position to advise your creditor or their authorized collection agent that the relevant statute of limitation has expired then your creditor might be prepared to agree to a more generous settlement
If your creditor or its authorized collection agent has engaged in illegal, unprofessional, or socially unacceptable conduct during its attempts to collect a debt from you then you might be able to leverage this fact into a more generous settlement
What are four good reasons for making a consumer proposal?
As mentioned earlier making a consumer proposal is one of a number of options for resolving your debt. When it comes to making a final decision about whether or not to make a consumer proposal there are a number of threshold issues you should address:
You cannot eliminate certain types of debt by making a consumer proposal—secured debt, and non-dischargeable debt (spousal support and child support obligations, government fines, and civil judgments involving fraud)
You must meet with a bankruptcy trustee in person
You must satisfy the bankruptcy trustee that you are insolvent as defined by the federal Bankruptcy and Insolvency Act
You must provide the bankruptcy trustee with a list containing the details with respect to all of your debts
In your consumer proposal you must include each and every one of your debts including (i) unsecured debt, (ii) monies owing to the government, and (iii) student loan debt–but not your secured debt and not non-dischargeable debt
If you make a consumer proposal you are not in a position to take advantage of the expiry of a limitation period to avoid paying any of your unsecured consumer debts
You must owe a minimum of $10,000 to your creditors
You cannot owe more than $250,000 to your creditors, excluding mortgage debt
Your income must be such that you can afford to repay approximately thirty-five percent of the monies owed to your creditors by making monthly payments over a period not to exceed five years
You cannot miss three consecutive monthly payments in which case your consumer proposal is annulled
You are not entitled to have credit during the life of your consumer proposal—the length of which is typically three to five years
You do not have any options—superior to making a consumer proposal—for resolving your outstanding debt
I have identified four good reasons for making a consumer instead of settling debt on your own:
1. You don’t feel comfortable settling your own debt
You might feel, for whatever reason, that settling your own debt is not for you. These reasons might include one or more of the following:
You do not feel that you are knowledgeable enough to try settling your debt on your own
You prefer the certainty of a consumer proposal over the uncertainty associated with settling debt on your own
You do not feel comfortable negotiating settlements with representatives from your creditor or their authorized collection agent
Settling your debt on your own is not available until the debt has been unpaid for a minimum of six months
Interest will likely continue to accrue on your outstanding account
You will receive payment demands from creditors
You might be sued
You lack the discipline to set aside monies on your own to fund future settlements
2. Your wages are currently subject to garnishment
Making a consumer proposal can be an attractive debt resolution option if you are currently subject to a wage garnishment. If you make a consumer proposal then any wage garnishments against you—excluding those for child support and spousal support—will be terminated. The protection from creditors offered by a consumer proposal is only available if you do not default making your monthly payments to your bankruptcy trustee.
3. You have been sued and you own real property
Making a consumer proposal can be very attractive if you are sued and you own real property in your own name. If you are sued and your creditor obtains a judgment against you then it can put a lien on your real property at which time your creditor is transformed from an unsecured creditor to a secured creditor.
At some future date—when you refinance or sell the property—your secured creditor will likely recover most, or all, of his original judgment against you, plus post-judgment interest which can be a substantial amount. This secured creditor will likely recover somewhere between 80 cents and 150 cents on the dollar with respect to your original indebtedness. Compare this to the 35 cents on the dollar this creditor would receive if you were to make a consumer proposal before this creditor were to obtain a judgment against you!
4. You owe a substantial amount of money to the government
If you owe a significant amount of money to the government then making a consumer proposal can be an effective way to eliminate this debt for approximately 35 cents on the dollar. In contrast, in the absence of making a consumer proposal or filing for personal bankruptcy then you might be facing repayment of 100 percent of monies owing to the government, plus additional monies for penalties and interest. Governments do not, however, collect 100 percent of the monies Canadians owe to it. In a future blog I will provide advice to consumers who are trying to deal with collection efforts by the Canada Revenue Agency.
You might want to contact a bankruptcy trustee to learn more about making a consumer proposal. If you want to learn more about settling your debts on your own then I would invite you to read my book The Wolf At The Door: What To Do When Collection Agencies Come Calling (2010) published by McClelland & Stewart—available as an e-book on www.amazon.com.
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