Until you or a loved one needs help with debts, you probably don’t spend much time thinking about credit and debt counselling. If you’re struggling with debt or just need to improve your credit rating in order to get a mortgage or other loan, you may want to continue reading to learn more.
1. What is Credit Counselling?
Credit counselling is a process where a person gets help with debt settlement through budgeting, education, and a variety of tools, with the ultimate goal to eliminate debt. Credit counselling agencies offer these services to the public and, after you sign a contract with them, will work on your behalf to negotiate with your creditors to resolve any debt you are unable to pay.
Some credit counselling agencies are non-profits that work for you for free or very low rates, while others are for-profit and can charge high fees to do the job.
Within Canada, the Financial Consumer Agency of Canada wants consumers to be aware that upon entering into an agreement with a credit counselling agency, an R7 credit rating will be applied to their credit report. Their credit report will show they used credit counselling, and that will remain on their report for at least two years after completion of the counselling program.
Landlords, lenders, and employers can see that information, which may result in the denial of rental applications, job applications, and loan applications.
3. How Credit Counselling Works
A credit counselling agency typically offers a wide range of services to help individuals who are struggling with debt and have a hard time managing money. They can help with budget planning and offer Debt Management Plans, or DMPs. These Debt Management Plans must not be confused with consumer proposals, which are offered by a Licensed Insolvency Trustee.
Consumer proposals are legal agreements approved by and offering protection of the courts. A debt management plan is voluntary on your part as well as your creditors. Your creditors are not obligated to participate (unlike in consumer proposals), and there’s no protection against any legal action brought against you by your creditors.
4. Wage Garnishments and Legal Action
With a debt management plan, a creditor can keep garnishing your wages and pursuing legal action if they don’t want to participate in the plan. With a consumer proposal, all collection calls, threats of legal action, and wage garnishments must stop when a consumer proposal is filed.
5. Fees and Costs
With a debt management plan, additional fees are common and vary according to the credit counselling service you choose. With a consumer proposal, there will be no more fees aside from your monthly payment.
6. Payment Schedule
With both a debt management plan and a consumer proposal, you make a single monthly payment.
7. Amount of Debt Repaid
With a debt management plan, the individual will usually pay the total amount owed. With a consumer proposal, the individual will usually only pay a portion of the total amount owed.
8. Court Approval
A debt management plan is a voluntary agreement that doesn’t receive court approval. A consumer proposal is filed by a Licensed Insolvency Trustee and is approved by the courts.
9. Interest Charges
With a debt management plan, it’s up to each creditor to decide if they want to freeze interest charges. With a consumer proposal, all debts that are included in the proposal are frozen and won’t earn any additional interest.
10. Repayment Period
With a debt management plan, the maximum repayment period is four to five years. With a consumer proposal, the maximum repayment period is five years.