What You Should Know about Credit Counselling

Credit counselling can be an alternative to insolvency for Canadians who find their income isn't enough to cover their monthly debt obligations. 

Household debt on the rise

As the recession wears on and more Canadians lose their jobs, it's natural for household debt levels to rise. The problem is, many Canadians had been overextending themselves even before the recession hit - leading to record-high debt levels and, unsurprisingly, late payments.

Statistics Canada reports that debt load (the ratio of total debt to disposable income) has been increasing dramatically since the early 1980s. In 2002, it surpassed disposable income, and by 2005 Canadians owed $1.16 for every dollar of disposable income. In 2008, average Canadian household debt soared to over $90,000, with the debt load climbing to 140%.

With traditionally conservative Canadians living the majority of their lives on credit, it's not a surprise that more are receiving phone calls from creditors. The good news is, if you've just started to fall behind in your bill payments, bankruptcy doesn't have to be your only option.

In cases where a little extra time and lower interest payments - as well as some extra discipline - are all you need to get your finances back on track, consider contacting a credit counsellor. Unlike bankruptcy trustees, a credit counsellor has no legal power, but they can work with creditors to offer you a bit of interest relief.

How can credit counsellors help?

Credit counsellors negotiate with creditors to accept lower interest payments. They help you pool debt into a single, manageable monthly payment and then divvy this payment up among the creditors. Unlike consumer proposals, credit counselling services require debtors to pay 100% of the amount owed, but the debtor has between four and five years to pay the debt off.

Credit counsellors also offer a variety of other services, from budgeting and personal finance services to administering debt management plans. Not-for-profit organizations, such as Credit Counselling Canada - a national association of credit counselling agencies and orderly payment of debt programs - offer these programs at a very low cost. Through donations and support from creditors, the association can also offer some services free of charge.

While credit counselling services can be invaluable for individuals who have not yet had to liquidate their assets to pay off their debts, they do nevertheless affect your credit rating. These services stay on your credit report as an R7 rating for three years after debts are paid.

Credit counselling resources

If you or someone you know could benefit from the services of a credit counsellor, below is a list of helpful resources:

Credit Counselling Canada - National association of not-for-profit credit counselling agencies and Orderly Payment of Debt programs that work together to increase consumer awareness of available assistance programs.

The Ontario Association of Credit Counselling Services - An umbrella organization that can help you contact your nearest responsible credit counselling service.

Take Charge of Your Debts - Canada’s Office of Consumer Affairs offers comprehensive information and resources to help you manage your debt.

Financial Consumer Agency of Canada - Find information on credits, loan and debt, including your rights and responsibilities and a list of helpful tools and publications.