What are your debt-relief options?
When you're going through tough financial times- caused, perhaps, by a job loss, emergency or illness - credit card payments may get missed. Miss a few more, and you could start getting pressured by collection agencies.
That's a pretty stressful situation, especially if you think your only option is "pay up ... or else."
However, the truth is, you have several options.
"As a general rule, I am of the view that you should almost never be paying a collection agent, because there is almost always a better option for you," says Doug Hoyes, a licensed insolvency trustee and co-founder of Hoyes, Michalos & Associates. Hoyes is also the author of the upcoming Straight Talk on Your Money.
Before you even think about paying anything, Hoyes says you should get proof of the debt in writing.
Find out who the collection agency is representing and how much you owe. You have the right to make sure it's a legitimate debt. If it's not - don't pay.
It's possible a mistake has been made; maybe you're not the John Doe in question, or you paid the debt already. It's also possible that the debt is yours, but it's still not a legitimate debt.
"Under Ontario law, a normal creditor, such as a bank, can only sue someone for a debt if they do it within two years of the last activity date, so within two years of when I made my last payment, for example," says Hoyes.
All provinces and territories have a statute of limitations that ranges from two years to as long as six years.
"If a collection agency is contacting you for an old debt, then I don't really see the point in paying them, because they have no leverage," says Hoyes.
If they take you to court in a jurisdiction that has a limitations period that has passed, he says, "they'd be out of luck."
Option #2: Pay up
Of course, it's entirely possible that the debt is yours and that the collector (whether it be a collections agency or the original lender) is within their rights to pursue you for it.
"If you legitimately owe the money, and if you have the money to pay them, then pay them," says Hoyes.
If the debt is fairly new, he recommends going back to the original creditor rather than paying a collection agency.
"If I'm going to pay the debt, I want to make sure it's accurately reflected as paid on my credit report," he says.
Of course, creditors only turn debt over to a collection agency when you're at least three months in arrears, and it's probably closer to six. Barring a huge emergency or setback that caused you to forget about the debt, "Most likely you owe the money, and most likely you can't pay," says Hoyes.
That takes you to your other options:
Option #3: Make
"In some cases, a creditor might be willing to accept monthly payments," says Mark Silverthorn, former collection agency insider, author of The Wolf at the Door: What to Do When Collections Agencies Come Calling and founder of Comprehensive Debt Solutions.
"If a creditor is willing to accept monthly payments and to freeze the interest, that's actually more attractive in a lot of ways than some other options," Silverthorn says.
"Unfortunately, collection agencies don't like that because, in a lot of cases, they are getting a commission based on what they're collecting," says Hoyes. They'd rather get a lump sum than small monthly payments. So you may be more successful in arranging a payment plan if you're dealing with the original creditor.
However, think twice about simply making a "good-faith" payment. Even a small $10 payment can have unforeseen repercussions, says Hoyes.
For instance, if your debt is past the limitations period and you make a payment, no matter how small, he says, "You've started the clock ticking again."
The creditor has another two years (or whatever your province's statute of limitations is) in which to sue you.
Option #4: Reach
"If the debt is more than six months in arrears, the creditor might be willing to accept a one-time lump-sum payment for an amount less than 100 per cent of what you owe as settlement," says Silverthorn. "That type of resolution is something that the collection agency might suggest, or something that the consumer can suggest, and then it's just a matter of negotiation."
If you have a lump sum available to you, ask them what amount of money they would be willing to accept if you pay it out within a short period, say 30 days. "There's a lot of factors involved as to how generous a settlement a person can get," says Silverthorn.
- Have you been sued? Even if a creditor has sued you, says Silverthorn, "the consumer's still in a position to negotiate a settlement. They're just not in as good a position."
- Has the statute of limitations expired? If this is the case, you may not need to pay at all, so chances are good the settlement will be generous.
- Are you judgment proof? Silverthorn explains that there are certain people who are basically judgment proof, such as those who have no assets and live on social assistance.
- How much money do you owe to other creditors?
"In a lot of circumstances, creditors are willing to accept settlements at huge discounts," says Silverthorn. They know that the statute of limitations will eventually run out, and then they may not get paid at all.
"If you're going to make a settlement with them, obviously first they have to confirm that you legitimately owe the debt, and secondly, they have to confirm that they're going to accept your settlement," says Hoyes.
Before you send your cheque, get a letter from them confirming the details of the settlement, and that payment of the negotiated amount will constitute settlement of the debt in full.
"Once you've got that letter confirming that they'll accept the settlement, you send them the cheque so you've got the cancelled cheque at the other end as proof that they got payment," says Hoyes. Then they can't come after you for the rest of the money.
"Make sure you're looking at the whole picture, the big picture," he says. He explains that if you have other creditors you owe, they will have flagged your credit report so that they are notified any time there's new activity. In paying one creditor off, you may have three more hounding you for payment.
Option #5: Consumer
"It's very rare that I meet someone who only has one debt with one creditor," says Hoyes. "If you've got a collection agency after you for a debt, you probably have other debts." Making a deal with one creditor is not going to solve your debt problem.
"Having a collection agent phone you, that's not the problem," Hoyes says. "That's a symptom of the problem. Understanding what caused the problem in the first place is crucial."
This may involve some credit counselling to learn some ways to be more frugal or to better manage money. But for most of the people he works with, he says, it's not that simple.
"In most cases we deal with, the problem is low income," says Hoyes. "Our typical client has take-home pay that is roughly 38 per cent lower than the median income in Ontario."
They may have lost their jobs, been sick and unable to work, or gone through a divorce. "So if you have less money coming in and you use credit to survive ... it compounds the problem," he says.
Rather than scraping together the money to get one creditor off your back, he suggests looking for a more permanent solution to your problem, such as a consumer proposal.
"Under a consumer proposal, the trustee will recommend to the consumer's creditors that they repay a percentage of their unsecured debt, and if the creditors agree, then the consumer will repay that in monthly instalments over a period not to exceed five years," says Silverthorn.
So rather than making a settlement with one creditor, you're making a settlement with all of them, and, he adds, you'll also get protection from interest.
"If a consumer fails to make three consecutive payments or is more than 90 days in arrears, then the consumer proposal is annulled, and it's treated as though it never happened," Silverthorn says. "So it's important if you're going to do a consumer proposal that you have a regular source of income."
Seasonal workers, for example, may find it difficult to stick to the terms of the proposal.
Debt settlement plan
A debt settlement plan is usually offered as part of a non-profit credit counselling agency's services.
"The problem with credit counselling is that it's typically the most expensive way for a consumer to eliminate their debt," says Silverthorn. "The consumer is going to repay 100 per cent of their unsecured debt at the time that they enrol in their debt management plan. They're also going to pay a fee to the non-profit credit counselling agency."
Some creditors may also refuse to offer interest relief, he says.
"That means that when a consumer does credit counselling and completes it, they're going to pay somewhere between $1.05 to $1.20 to eliminate $1 of debt," says Silverthorn. "If you compare that to a consumer proposal, it's two or three times as expensive."
The Hoyes, Michalos & Associates website offers a debt payment calculator that gives you an idea of how much your different options will cost you, either per month or over the five-year period of most plans.
"Bankruptcy is typically the option if you have relatively low income and relatively low assets," says Hoyes. "If you have a better job and/or if you perhaps have some equity in a house, then a consumer proposal becomes the preferred option."
Having equity in a home also gives you numerous other options, including refinancing or getting a secured line of credit to pay off your creditors.
"When people come to see us or come to see any licensed insolvency trustee, our job is to assess their entire situation and present them with all the options," says Hoyes. "If these other options aren't possible, then we have to talk about a proposal or a bankruptcy as the solution that's going to finally get rid of those debts."
It's all about helping people get back on their feet.
"What I find is that, typically, most people who feel that their life is in the dumps because of debt, things aren't nearly as bad as what they think," says Silverthorn.See related: Can the statute of limitations erase your debt?, What to do if you fail your debt consolidation plan, 5 factors in choosing a debt consolidation plan
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