What is Debt Forgiveness?
Debt Forgiveness is a partial or complete reduction in your debts. It helps you improve your financial situation and avoid bankruptcy when you are struggling with debt. Achieving success with this can be a complex process with many limitations.
There is the possibility that it can happen with different types of loans, like credit cards, student loans, taxes, or mortgages. Debt forgiveness comes with implications, credit damage, and eligibility requirements. It works differently depending on the type of debt you have. For example, if you have credit card debt and the issue is that you can’t pay credit card debt, after many months of you not paying, the issuer could choose to sell your debt to a collection agency, and the agency might be interested in settling the debt for a lower amount than what you owe.
With debt forgiveness, you can save money by paying a lower amount than what you were supposed to pay. It also makes getting rid of debt much faster and avoids further interest charges and fees. It helps in reducing the stress that comes with outstanding debt, and it also helps in improving your cash flow. Although, it does have a negative impact on your credit score. So this isn’t something to be approached lightly and will entirely depend on an individual’s situation. A creditor also needs to have good reason to forgive either a portion or all of a debt. The two most common reasons would be found in the two insolvency options discussed below.
Your Options for Debt Forgiveness in Canada
When you are fed up with collection calls and overbearing debt, debt forgiveness may seem like the perfect solution. There are no official government-backed debt forgiveness programs in Canada. The closest most people can come are by using one of two debt solutions for debt forgiveness that can become legally binding on your creditors.
The first one is bankruptcy, which is the most drastic debt relief option in Canada. It can involve surrendering your non-exempt assets. Each province has specific exemptions, and the whole process is taken care of by a bankruptcy trustee which are now officially called a Licensed Insolvency Trustee (LIT). The trustee will sell any assets that need to be sold and use the proceeds to pay off lenders. For 7 to 8 years from when you file for bankruptcy it will very negatively impact your credit score and your ability to borrow money.
The second option is a consumer proposal, which is often promoted as a less severe option for debt forgiveness in Canada. It is about a bankruptcy trustee making an offer to your creditors to pay only a portion of the debt you owe, thus forgiving the remaining debt. It entirely depends on your creditors whether the proposal is accepted or not. This options is generally thought to prevent you from losing your assets or filing for bankruptcy, but this is not always the case. Unless you have a very legitimate reason to not repay the full amount of your debt, some creditors will accept nothing less than full repayment of the debt they are owed. Getting debt forgiveness is not easy, but fortunately, there are alternatives you could also consider such as a Debt Management Plan. Speak with a credit counsellor to explore all your options and see what may be available to you, or get a quick idea now by just answering 9 short questions further below.
If you’re looking for a creditor to write off a debt on compassionate grounds, you can try using this compassionate write-off sample letter template.
