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Debt…the word generally avoided, especially in today’s economic climate. However, there are many reasons to being in debt. Loss of employment, medical condition, family emergency, business decline, overspending – are some of the examples from daily reality. The worst part is that once in debt, it is very hard to get out of the hole. The high interest rates make it almost impossible to payback the funds in a reasonable amount of time. Some are fortunate, with finding decent paying position they recover in a year or two and continue as nothing ever happened. However, many are living from paycheck to paycheck, barely scraping enough money to pay for housing, food, and to service the debts.

The Canadian Legal system offers a variety of solutions for people who are financially struggling and are burdened by debt. Debt Solutions such as Loan Consolidation, Consumer Proposal, and Bankruptcy offer a legal relief thorough a settlement with creditors or a bankruptcy discharge. The honest but unfortunate individuals can solve their debt problems, breath relief, and begin living again with a fresh start.

We will briefly touch on these three options to inform you on the process, the benefits, and the drawbacks.

1. Loan Consolidation is a process where all the unsecured debts are consolidated into a one new loan. All the previous accounts are paid off and the debtor is left with one, usually large loan to pay off. Some of the benefits of debt consolidation are that the interest rate is usually lower then on the previous accounts; the debtor can track his payments and service the debt more easily (instead of having ten different accounts to maintain); and the credit history of the debtor is not significantly impacted. Debt consolidation loan is not easy to get though, as the debtor credit rating is usually impacted by few missed payments and large debt load; the banks are hesitant to issue another loan. However, this loan can be backed up by an equity in a property or a cosigner. Great care must be taken to avoid spending the money on just covered credit cards, the risk of getting more indebted is overwhelming. It is advisable to cut up all the cards and to close all the credit accounts to avoid getting deeper in debt.

Altogether, loan consolidation is a great way to organize and manage debt, as it usually lowers the interest rate, establishes a structured form of repayment and provides some relief.

2. A Consumer Proposal is a settlement with creditors. The debtor proposes a solution to the creditors, and the negotiation takes place over the terms of the repayment and the amount of debt write off. The Consumer Proposal administration is undertaken by a trustee in bankruptcy or by a debt management company that works with trustee in bankruptcy.

Many factors effect the outcome of the negotiations: employment situation, debt amount, assets owned by the debtor etc. Generally fifty to seventy five percent of the unsecured debt can be written off, and the remaining balance is spread over a three or five year period, to be paid off in monthly payments. The benefits of a consumer proposal application are that the debtors can retain all of their assets, actions against them by unsecured creditors, such as wage garnishments, will be stopped and they can solve their debt problems without having to declare bankruptcy.

There are a number of conditions that have to be met in order to qualify. Some of the examples:

The debtor has to be employed, provide proof of employment, the debtor cannot have any substantial equity if they own a property, etc.

The record stays in the debtors credit file for six years after the date of filing and it usually takes three years to rebuild credit rating.

3. Although Bankruptcy is often though of as a measure of last resort and usually undertaken when all other methods to resolve debt problems have failed, is a legal process nevertheless, and if administered properly can offer protection from financial obligations. It relieves the debtors from their legal obligation to pay the outstanding funds, as well as protects their future earning and assets from repossession. However, bankruptcy does not protect from the secured creditors. In such cases the loan is secured by some form of collateral and often the collateral is auctioned to pay back the creditor(s).

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