Debt sucks.

Okay, let's back up. There's good debt and bad debt. Good debt helps you build credit and invest in your future. Bad debt, on the other hand, is debt that you can't afford to pay back or that doesn't benefit you in the long run.

If you find yourself drowning in bad debt and struggling to make ends meet, don't panic. In this guide, we'll discuss some of the best ways to tackle your debt and get your finances back on track:

• How to manage personal debt
• Tips and advice by debt type
• 3 different ways of getting debt relief
• How to improve your credit score while in debt
• How debt relief impacts your credit score

P.S. — If you're a homeowner, there's a way for you to replace your bad debt with good debt. A debt consolidation loan based on your home equity can help you pay off your high-interest debts and give you a lower monthly payment. Lotly works with you and our network of 50+ lenders to ensure you get the best rates across the country. Book a free consultation today to see how it works!

How to manage personal debt (creating a repayment plan)

When faced with overwhelming debt, it can be difficult to know where to start. Creating a repayment plan is an essential step in managing personal debt, and several options and resources are available in Canada to assist you in this process.

Seek professional assistance

One option for creating a repayment plan is seeking help from a financial advisor or credit counseling agency. These professionals provide guidance on how to manage debts, negotiate with creditors, and create a realistic repayment plan based on your individual financial situation.

Prioritize your debts

When creating a repayment plan, it's important to prioritize which debts need to be paid off first. Generally, debts with high interest rates such as credit card balances should be tackled first, as they can quickly accumulate and become unmanageable.

Prioritizing debts also means making at least the minimum payments on all debts to avoid late fees and penalties.

Create a budget

Creating a budget is another crucial step in managing personal debt. This involves:

• Tracking expenses
• Cutting unnecessary spending
• Allocating funds towards debt repayment

Many online tools and resources are available to help you with budgeting, like budgeting apps or templates.

Consider debt consolidation

Debt consolidation involves combining multiple debts into one single payment, often with a lower interest rate.

• This can make it easier to manage and pay off debts and potentially reduce the overall amount owed.
• There are various options for debt consolidation in Canada, such as obtaining a personal loan or using a balance transfer credit card.

If you're a homeowner, Lotly can help you find a consolidation loan option that taps into your home equity so you can get the best possible rates, personalized to your financial situation.

Explore debt relief programs

In cases of severe financial hardship, there may be options for debt relief through government programs or non-profit organizations. These programs often involve negotiating with creditors to reduce the amount owed or creating a repayment plan based on your income.

It's important to research and carefully consider these options before committing to them, as they may have long-term impacts on your credit score.

Tips & advice by type of debt

Different kinds of debt generally have varied interest rates, terms, and conditions. Here are some tips and advice for handling different types of debt:

Credit card debt

• Make sure to pay more than the minimum monthly payment to avoid paying excessive interest.
• Consider transferring your balance to a low-interest credit card or consolidating multiple high-interest cards into one.
• Cut back on unnecessary expenses and use that money to pay off your credit card debt.
• Contact your credit card company to negotiate a lower interest rate or a repayment plan.

Student loan debt

• Look into government programs, such as income-driven repayment plans, which can help lower your monthly payments based on your income.
• Check if you qualify for loan forgiveness programs, especially if you work in public service or for a non-profit organization.
• Consider refinancing your student loans to get a lower interest rate and save money in the long run.
• Heads up — always review the finer details of your student loans with your financial institution, program administrator, or financial advisor to make the best possible decision.

Mortgage debt

• You could refinance your mortgage to take advantage of lower interest rates and lower your monthly payments.
• Cut back on unnecessary expenses and use that money towards making extra payments on your mortgage to pay it off sooner.
• Consider downsizing to a smaller, more affordable home if you're struggling to make mortgage payments.

Personal loan debt

• Consider debt consolidation loans to combine multiple debts into one monthly payment with a lower interest rate.
• Prioritize paying off high-interest personal loans first to save money in interest.
• Look into getting a part-time job or starting a side hustle to increase your income and put that extra money towards paying off your personal loans.

We understand these tips and tricks might not cover everything, so let's get into some more macro-level strategies for handling your debt relief.

3 different ways of getting debt relief

Debt relief programs (government)

Here are three debt relief programs available in Canada:

1. Debt Management Program (DMP)

• Eligibility: Individuals struggling with unsecured debts such as credit cards, personal loans, or lines of credit.
• Description: some text
  • A DMP consolidates multiple unsecured debts into a single monthly payment. 
  • Credit counselors negotiate with creditors to reduce interest rates and waive fees, facilitating a structured repayment plan.

2. Consumer Proposal

• Eligibility: Individuals with unsecured debts up to $250,000 (excluding a mortgage on a principal residence) who are unable to meet their debt obligations.
• Description: some text
  • A legally binding agreement administered by a Licensed Insolvency Trustee (LIT), allowing debtors to propose a partial repayment to creditors over a maximum of five years. 
  • This option avoids bankruptcy and provides legal protection from creditors. Creditors may agree to forgive a portion of the debt, often resulting in repayment of 30% to 70% of the original amount owed.

3. Orderly Payment of Debts (OPD)

• Eligibility: Residents of Alberta, Nova Scotia, and Prince Edward Island with unsecured debts who are unable to manage their debt load.
• Description: some text
  • A court-approved program that consolidates debts into one monthly payment with a fixed interest rate of 5%.
  • It provides legal protection from creditors and is administered by a designated agency in each province.

These programs offer structured solutions to help Canadians manage and reduce their debt burdens.

Pros:

• Avoid bankruptcy: Consumer proposals and OPD programs provide an alternative to bankruptcy, allowing individuals to repay their debts without having to go through the legal process.
• Legal protection: Both options provide legal protection from creditors, preventing them from taking any collection actions against the debtor.
• Structured repayment plan: These programs offer a structured repayment plan with manageable monthly payments, making it easier for individuals to budget and manage their debt load.
• Reduced debt amount: Through negotiations with creditors, both consumer proposals and OPD programs can result in reduced overall debt amounts, making it easier for individuals to pay off their debts.

Cons:

• Impact on credit score: Entering into a consumer proposal or OPD program will hurt your credit score — however, continuing to miss your debt payments will hurt it more in the long run.
• Less flexibility: Unlike informal debt management plans, which allow for changes in payment schedules and amounts, both consumer proposals and OPD programs have fixed repayment plans that cannot be altered.
• Strict eligibility requirements: Not everyone is eligible for these programs, as they are only available to residents of specific provinces with certain types of unsecured debts.

Best for:

• Individuals with high levels of unsecured debt (e.g. credit card debt, personal loans)
• Those who are struggling to make minimum payments on their debts
• People looking for a structured and manageable repayment plan
• Those who do not want to file for bankruptcy but still need legal protection from creditors. 

Overall, while consumer proposals and orderly payment of debts can provide relief from overwhelming debt burdens and prevent bankruptcy, they also come with some limitations.

Debt settlement services

Debt settlement services, also known as debt relief or debt negotiation programs, are another option for individuals struggling with large amounts of unsecured debt. These programs involve a third-party company negotiating with creditors on the debtor's behalf to reduce the total amount owed.

Pros:

• Reduced debt amount: Debt settlement services can help reduce the overall amount of debt owed by negotiating with creditors for lower balances.
• Single monthly payment: Instead of making multiple payments to different creditors, individuals in these programs make a single monthly payment to the debt settlement service, which then distributes the funds to their creditors.

Cons:

• Upfront fees and potential scams: Some companies offering these services may require upfront fees and may not always have the individual's best interest in mind. It's important to research and choose a reputable company if considering this option.
• Impact on credit score: Debt settlement services can also negatively impact an individual's credit score, as payments are often made late or skipped altogether during the negotiation process.

Best for: 

• People with a large amount of unsecured debt cannot make minimum payments.
• Individuals willing to accept the potential negative impact on their credit score in exchange for reduced debt amounts.
• Those who have exhausted other options such as consumer proposals and orderly payment of debts.

Despite these drawbacks, debt settlement services can be a viable option for you if you’re struggling with unmanageable debt.

Debt consolidation loans

Debt consolidation loans involve taking out a new loan to pay off multiple existing debts. This allows you to make one monthly payment with lower interest rates and longer repayment periods.

Pros:

• Simplified repayment: With only one monthly payment, you can better manage your debt and avoid missed or late payments.
• Lower interest rates: Consolidation loans may have lower interest rates than the individual's current debts, allowing them to save money in the long run.
• Improvement of credit score: By consistently making on-time payments, you can improve their credit score over time.

Cons:

• Possible high upfront fees: Some lenders may charge high upfront fees for debt consolidation loans, which can increase the overall cost of the loan.
• Longer repayment period: While a longer repayment period can lower monthly payments, it also means paying more interest over time.

Best for:

• Individuals with multiple high-interest debts who are struggling to keep up with payments.
• Those looking for a simplified repayment plan and potentially lower interest rates.
• People who want to improve their credit score by consistently making on-time payments.

Research and compare different lenders before taking out a debt consolidation loan. Look for reputable companies with reasonable fees and interest rates that fit within your budget. Lotly can help here by the way — our network of lenders is vetted and reliable, to ensure you get the best deal possible.

How can I improve my credit score while in debt?

• Make payments on time: Consistently making on-time payments can help improve your credit score over time.
• Pay off high-interest debts first: Prioritizing and paying off high-interest debts first can also positively impact your credit score.
• Keep credit card balances low: High credit card balances can negatively affect your credit score, so try to keep them under 30% of the total credit limit.
• Consider debt consolidation: A debt consolidation loan can help simplify repayment and potentially lower interest rates, leading to better financial management and an improved credit score.

How does debt relief affect your credit rating?

This largely varies based on the kind of debt relief you get:

• Debt settlement: While it can result in lower overall debt, it typically hurts credit scores as payments are missed during the negotiation process.
• Credit counseling: A credit counselor can work with you to create a budget and repayment plan for your debts. This option does not directly affect credit scores, but missed payments on the created plan can have a negative impact.
• Bankruptcy: Filing for bankruptcy can significantly harm your credit scores, as it involves the discharge or restructuring of debts. It can stay on your credit report for up to 10 years.
• Debt consolidation: As mentioned earlier, debt consolidation loans can help simplify repayment and potentially lower interest rates. While this option may initially have a negative impact on credit scores, consistently making payments can improve scores over time.

For most borrowers, we suggest going with a consumer proposal or debt consolidation as a means to help you repay outstanding debt.

Being debt-free doesn't have to be a dream with Lotly

Let's recap what we've learned so far:

• Develop a repayment plan and seek expert help. Start by creating a realistic budget and repayment plan, with priority given to high-interest debts; a financial advisor or credit counselor can provide personalized guidance.
• Explore debt relief options tailored to your needs. Options like debt consolidation, consumer proposals, and government debt relief programs can simplify payments and reduce total owed amounts but may impact your credit score.
• Be mindful of credit score impacts and choose the right strategy. Debt relief methods like debt settlement or bankruptcy can lower credit scores, while consistent, on-time payments and consolidation loans may improve them over time.

With careful planning and the right tools, being debt-free is an achievable goal. And with a debt consolidation loan, you can replace your bad debt with a manageable, single monthly payment.

Lotly works with you to find a customized debt consolidation loan option that uses your home equity to get the best rates, pulling from our network of over 50 lenders across Canada. Book a free consultation today to see how we can help you.

Frequently Asked Questions

What is a debt consolidation loan?

A debt consolidation loan combines multiple debts into one, usually with a lower interest rate and longer repayment period.

Will consolidating my debt affect my credit score?

Consolidation loans can have both positive and negative impacts on your credit score. Initially, it may slightly decrease due to opening a new line of credit. However, consistently making payments can improve scores over time.

Can I consolidate all types of debt?

Most types of unsecured consumer debt, such as credit card balances, personal loans, and medical bills, can be consolidated. Secured debts like mortgages or car loans typically cannot be consolidated. In Canada, debt relief can take many forms, however — so there may be an option that’s right for you.

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