Based on working in the Credit and Financial industry for over 8 years now here is what I feel are the best ways to get out of debt. Really, if you condense down every program offered online these days in Canada for dealing with debt the all pretty much fall under one of these categories as there are really no other ways to get out of debt (legally) in this country.

So here they are the best ways to get out of debt:

1) Sell Assets:

ADVANTAGES – Pays down debt with no effect on credit; reduces your interest cost.

DISADVANTAGES – For some people they no assets to sell. And having no car is the first thing to consider when seriously wanting to get out of debt is what you can sell to eliminate your debt. This is the option that is “easy to say, but hard to do!” Sure, it hurts to sell that extra car or even consider selling the home but the seriousness of the debt situation may call for more extreme measures to fix it.  If you work with a certified financial planner this is something you should discuss with them to help determine what might be the best item to liquidate and pay off your debt. For example – it may be worth liquidating a poor performing investment to pay off extremely high interest credit card debt but it may not be worth cashing in RRSP to pay off low interest debt.

2) Make Life Changes: 

ADVANTAGES – Pays down debt with no effect on credit; reduces your interest cost over time.

DISADVANTAGES – For some people they have ‘trimmed’ back their spending as much as they possibly can and they still cannot balance their budget due to high debt payments.Consider where you can “cut the fat”. Where can you reduce personal living costs and still maintain a reasonable standard of living – example: only put the kids in one extracurricular activity per year instead of many; or cut back on cable programs to get basic cable, start shopping at used clothing and consignment stores or, in extreme cases, even use the food bank (the food bank is not for street people, it is actually for the ‘working poor’). Making sacrifices now pays off in the long run when you are debt free with no effect to your credit. Truly the best way to get out of debt is to make life changes to reduce your spending or increase your income or both if you can.There are many debt pay down concepts – one is called the DEBT SNOWBALL (aka Debt Stacking) which involves paying off your smallest credit cards first and then cutting them up and putting the extra money from not having that card payment now onto the next smallest credit card and so on – create a snowball effect of gaining momentum. This can work great when properly executed.

3) Re-Finance your House (increase your mortgage balance to access money):

ADVANTAGES – Pays down debt with a more positive effect on credit and reduces the interest rate of your debt to the new low interest rate of a mortgage. This is in a way consolidating your debts, but it is not a true Consolidation Loan.  You are simply moving your credit card and other debt over to your home mortgage which has its own disadvantages.

DISADVANTAGES – Using your house as a piggy bank is NOT good financial planning. At some point in your life (retirement) you need to have your mortgage paid off. And if you keep remortgaging the house to pay off debt you will NEVER get the house paid off, and you WILL find yourself struggling financially in retirement.  Retirement Bankruptcies are at an ALL TIME HIGH, so don’t follow the masses, do something different. If you are really committed to staying out of debt forever then do this option only once. But remember, some people seem to keep themselves in a cycle of loading up on credit card debt and then re-financing it into their home mortgage by way of increasing their mortgage at renewal time – and this goes on until it’s too late and they find themselves old and broke. Not fun.

4) Consolidation Loan – This is a new, single large loan taken to pay off all your other loans and credit cards etc.

ADVANTAGES – Pays off high interest debt and consolidates it all into one single payment (but still at an interest rate). Has no negative effect on credit.  It usually is simply a new loan to pay off old loans.

DISADVANTAGES – There is nothing ‘magic’ happening here, you are really just moving debt around from one place to another. It will not likely lower your monthly debt payments and they are very difficult to qualify for and can be tough to pay. The reason it does not lower the payments is that Consolidation loans are designed for you to get out of debt by paying back the full amount, so, the payment has both Principal (the total Loan Balance) and Interest (the cost to borrow) in the payment. A credit card has only interest in the payment and almost nothing goes to principal.  By simple math, the payment is generally higher with Consolidation Loans than with regular Lines of Credit or Credit Cards. These loans can sometimes be the last step before Bankruptcy. Sometimes, the payments can be so difficult to make that it pushes people to use their credit cards again for daily living expenses. As a result, the person has to pay both the Consolidation loan AND the credit cards, and their debts eventually balloon to be bigger than ever. Even worse, there are Predatory lenders that lend money for consolidating debt but their interest rates range from 20% up to 200% (well past the legal limit of what a lender can charge). I am constantly running into people who have borrowed money from some predatory online lender and their interest rates when calculated out to include all the extra fees etc. sometimes exceed 400%. Steer clear of any high interest consolidation loans or payday loans if you wish to ever get out of debt. Truth is – often people who try to get out of debt by using a Consolidation Loan (especially the high interest kind) often end up in Bankruptcy not long after they get the loan. Consolidation loans often do NOT deliver on their promise!

5) Non-Profit Credit Counselling: 

ADVANTAGES – This is a type of Consolidation as well, but it DAMAGES your credit. Credit Counselling basically puts all of your debts together into one payment and lowers the interest rate down to a low percentage rate and you pay back 100% of the debt over time generally.

DISADVANTAGES – It’s like expensive voluntary collection in my mind. You pay back all of your debt in full and there is major damage to your credit. So why do it? I fail to see the advantage. It is similar to Bankruptcy on credit as far as lenders see you and there are no savings on the debt principal. The opportunity to have a credit card or finance a house is not generally permitted during the program.Credit counselling is sponsored (funded) by the big banks and lenders. They only sponsor it because the program allows them to get all of their money back (you pay back 100% of what you owe). Another big disadvantage is that there is a COST. You have to pay a fee (but they call this a ‘donation’ which is misleading) and the fee is at least $50 per month for almost 5 years.  In the end you’re paying back almost 105% on your debt.  This does not seem like a good deal.

6) For-Profit Credit Counselling – same as above but an increased fee

7) Debt Settlement:

ADVANTAGES – Pay your creditors less than you owe them by offering a settlement. Saves money off the principal of the debt.

DISADVANTAGES – Very risky and the success rate is less than 20%; meaning many times the creditors will simply not settle and will instead sue the client if it is a big debt and garnish their pay. So yes debt settlement does in fact work, but it is very tricky to do, and you need to be in the perfect positon to do it (as in- not have any assets and not much income, and happen have a lump sum of money from family or other to offer them all at once). The other problem is that debt settlement programs are not regulated in most provinces and many of the companies are ripping people off by charging very large fees up front and then not getting them out of debt. Just watch this video to hear from a local Victoria BC person who hired a company from out east that she never met in person. They ripped her off by charging her thousands of dollars, and they never settled any of her debts, and all that happened is that she got sued by her credit card company which led to a wage garnishment and with horrible credit. Thank goodness she met us and we were able to reduce her debt and help her get the garnishment lifted (all without big upfront fees). Now she is back on track fixing her credit and is debt free. See for yourself her testimonial here – and again on the video here.

8) *Consumer Proposal (and Corporate Business Proposals Div1Sec3):

ADVANTAGES – Rapid debt relief with NO Bankruptcy! Reduces the amount of money owing on BOTH the Principal and also reduces the interest rate to zero. It allows a person to have up to 5 years to pay off the new lowered amount of debt. And clients CAN have a credit card during the process and CAN keep their house and all their assets and income. In most cases it lowers a person’s monthly debt payments by 70% which frees up monthly income to take care of family and life. Very little risk since the process is legislated and regulated and there is a “Stay of Proceedings” in place as soon as you start meaning you are protected by law from the collectors so no one can sue you or call to collect. It is as powerful as Bankruptcy yet without the lifelong consequences. This process is also a Consolidation process as it leaves the person with one simple payment to make at 0% interest and there is great flexibility in the timing and frequency with which you pay the proposal off and get out of debt. It is truly one of the best options we have in Canada for people that want to pay their debts but feel trapped under a burden of debt that they cannot seem to ever pay down no matter how hard they try. It allows a person to get a fresh start on their financial lives and do things differently. This process has a party called a Trustee who is there to represent your creditors to make sure they get a fair deal. Where we come in is we work with our clients to represent the client’s interest to make sure that they get the best deal, as in, our clients are generally paying much less than they would if they went elsewhere. We also do many financial counselling meetings with our clients including how to Budget and track spending and how to build better Credit (Fico/Beacon) score with their credit bureau. We are here to ensure our clients are financially successful in the long run. Learn more about why to work with us here.

DISADVANTAGES –The only few disadvantages of this option is that a person needs to pay back to their creditors more money than the creditors would get in Bankruptcy. And secondly there is a negative effect on your credit score. However we have 3 credit repair products and programs that put people back on track with credit immediately and often our clients are in better shape financially and credit wise in only a few years than they were before we met them. One other issue is that proposals are filed by someone (Trustee) who works for the creditors (banks etc.) and they have a duty to collect as much as possible. So that is where 4 Pillars comes in – we work for the client (you) behalf to help you reduce what they would normally have to pay in a proposal and represent the interest of the client to get them the best deal possible. And we help people recover their credit as fast as possible with our 3 credit rebuilding products and professional credit rebuilding counselling.

9) Bankruptcy:

ADVANTAGES – Generally the cheapest form of total debt relief, however, it is NOT free and there are lifelong consequences! This can be the best method of debt relieve for a few people with very high debt loads compared to their income. The lower a person’s income is and the less assets they have, the cheaper bankruptcy is generally.

DISADVANTAGES – Everyone knows that Bankruptcy destroys their credit, but what most people don’t realize is that it can be a gut wrenching negative experience that it is indeed PERMANENT record. That’s right – permanent!  Sure, it does fall off the credit records within 7-8 years (or 17 years if it’s a 2^nd bankruptcy), but there are other record keeping systems. There is also a very comprehensive and very large database of Bankruptcy’s in Canada where all the data for Canadian Bankruptcies are all in one single place, and its available to the public, and searchable.  Here is where to search the Bankruptcy records (there is a small fee for each search).  So because the record of you having done a Bankruptcy is permanent it can have longer term consequences for people than most people realize. For example; if you are ever applying for a loan you will notice that the loan application asks applicants “have you ever claimed Bankruptcy”, and of course if you have done so then you have to admit it – EVEN if it is not on your credit anymore you still must say yes. For some people it feels like they just can’t move on. Another scary statistic is that MANY people who claim Bankruptcy once will often claim Bankruptcy later in life a second time or more. And a second Bankruptcy remains on your credit rating for 14 years after it is discharged and can last from 2-3 years in the payment period making it affect people for a total of 17 years. A past Bankruptcy may also come back to haunt you later in life if you decide to apply for a securities license, or run for a public position, or want to apply for a senior leadership role in the military etc. So although Bankruptcy is the cheapest and best option for a few unfortunate people, we feel that most people should at least seek out and try other options first before just jumping straight into a Bankruptcy.

Written by Benjy Houser