In theory, the process for paying off your credit card debt is rather simple:
- Review the annual interest rates on all of your credit cards.
- Focus your financial resources on paying off the credit card balance with the highest rate of interest while maintaining the minimum payments on your other credit card balances.
- Once the credit card balance with highest interest rate has been paid in full, repeat step 2 for the credit card balance with the next highest interest rate.
- Repeat this process until all your credit card balances are paid in full.
What if you don’t have the financial resources to do this because your income is too low and/or your credit card debts are too high? What are your options?
A reputable credit counselling agency can play a useful role in helping you facilitate a plan to deal with your debts. The program offered by such agencies is called a Debt Management Plan.
A Debt Management Plan is an arrangement facilitated by a credit counselling agency whereby they would negotiate with your creditors:
- a reduction or stoppage of interest on your debts
- an extended period (usually no longer than 60 months) to repay your debts in full
Here are some facts about credit counselling agencies and Debt Management Plans:
DEBT MANAGEMENT PLAN FAQS
|What companies perform this service?||Non-profit credit counselling agency|
|Who accredits these companies?||Ontario Association of Credit Counselling Services (OACCS), Canadian Association of Credit Counselling Services (CACCS) or Credit Counselling Canada (CCC)|
|What are the repayment requirements?||All debts must be 100% paid in full|
|What type of debts can be included?||Banking debts such as credit cards, lines of credit, overdrafts, loans, etc.|
|How can I be eligible to participate?||A credit counsellor will review your budget, and it must demonstrate that you have the ability to repay debts in full over a period no longer than 60 months|
|What type of relief can this provide?||Lower or eliminated interest rates, waived late fees. Also, creditor harrassment will stop if they agree to the DMP.|
|What's the impact on my credit rating?||R7 until paid in full. The R7 is purged from your credit file 2 years after the completion date.|
|What's the maximum length of payment?||60 months|
|To whom do I make my payments once the plan is accepted by my creditors?||To the credit counselling agency, which deposits your payments into a trust account. The funds are held in trust for your creditors.|
|How are fees paid?||Although this will vary slightly from agency to agency, there is usually a fee of 10% of the monthly payment amount. The agencies are also funded directly by financial companies such as banks and credit card companies.|
|Examples of companies that perform Debt Management Plans||Credit Canada|
If you’d be unable to pay your debts in full with a Debt Management Plan but can repay some of the debt back over a period of up to 60 months, you should consider working with a Licensed Insolvency Trustee to make a settlement with creditors through a Consumer Proposal.
CONSUMER PROPOSAL FAQS
|What companies perform this service?||Federally Licensed Insolvency Trustee|
|Who accredits these companies?||Office of the Superintendent of Bankruptcy of Canada|
|What are the repayment requirements?||Repayment can range from 25% - 50% of debts owed. However, this will vary from situation to situation.|
|What type of debts can be included?||Almost any type of debt so long it's unsecured (i.e., the debt isn't secured by an asset like a car or a home). This would include debt owing to the government such as income taxes.|
|How can I be eligible to participate?||Must be insolvent. This means that the value of your debts must be greater than the value of your assets|
|What type of relief can this provide?||As soon as a proposal is filed, your creditors are legally prohibited from commencing or continuing legal action against you. Once the proposal is accepted by your creditors, you receive the following benefits: (i) eliminated interest; (ii) significant reduction in debt that must be repaid.|
|What's the impact on my credit rating?||R7 or R9 until paid in full (this depends on the debtor's province of residency). This is purged from your credit file 2 years (Trans Union) or 3 years (Equifax) after the completion date.|
|What's the maximum length of payment?||60 months|
|To whom do I make my payments once the plan is accepted by my creditors?||To the Licensed Insolvency Trustee, which deposits your payments into a trust account. The funds are held in trust for your creditors.|
|How are fees paid?||The Trustees fees are paid according to a government tariff and the fees are paid out of the proposal funds the Trustee holds in trust for your creditors. To put it simply, the Trustee's fees are paid by your creditors.|
|Examples of companies that perform the Consumer Proposals||Fong and Partners Inc.|
If you feel that a Debt Management Plan may be a viable option for you, here is a reputable credit counselling agency operating in the Greater Toronto Area:
This company has been around for decades (since the 1960s) and I have personally referred people to them. They are very reputable and are involved in the Toronto community providing educational seminars on personal finance.
Head office: 45 Sheppard Avenue East, Suite 810, Toronto, Ontario M2N 5W9
This post should not be interpreted as legal advice or a legal opinion. Please consult your Fong and Partners Inc. advisor to review your own particular circumstances.