Mistakes, Complaints and Official Sources
Can't keep up with personal loan payments? Options in Canada from hardship plans to consumer proposals
What to do in Canada when personal loan payments become unmanageable: talking to the lender, non-profit credit counselling, debt management programs and consumer proposals under the BIA.
If you cannot keep up with personal loan payments, act before you miss several of them. The options run from least to most drastic: ask the lender for a hardship arrangement, refinance or consolidate if you can genuinely lower the cost, see a non-profit credit counsellor about a debt management program, or meet a Licensed Insolvency Trustee about a consumer proposal under the Bankruptcy and Insolvency Act (BIA), which is available if your debts, not counting a mortgage on your home, are $250,000 or less and lasts up to 5 years. Bankruptcy is the last resort. Borrowing from a high-cost lender to make loan payments almost always makes the problem worse.
Part of personal loan mistakes and official sources. General information, not financial or legal advice.
Early warning signs
- You are using a credit card or line of credit to make loan payments.
- You are considering a payday or high-cost loan to cover a regular payment.
- You pay only minimums and the balances are not falling.
- More than one payment has bounced in recent months.
- Collectors have started calling.
Any one of these is a reason to take one of the steps below now.
Option 1: talk to your lender
Lenders generally prefer a workable arrangement to a default. Ask about:
- a payment deferral or skip-a-payment, understanding that interest usually keeps accruing;
- a temporary reduced payment;
- extending the term to lower the payment, accepting more total interest;
- changing the payment date to just after payday.
Get any arrangement in writing, including how it will be reported to the credit bureaus. If you have creditor insurance with disability or job-loss coverage, check whether a claim is possible; see loan insurance.
Option 2: consolidate, carefully
A consolidation loan helps only if it lowers the cost, not just the payment, and you stop adding new debt. Test it with the consolidation calculator and read the consolidation example. If the only consolidation offer you can get is near 35% APR, it is probably not a solution.
Option 3: non-profit credit counselling and a debt management program
Non-profit credit counselling agencies offer free or low-cost budgeting advice. If your debts are manageable with lower interest, they may propose a debt management program (DMP):
| Feature | Debt management program |
|---|---|
| Legal basis | Voluntary agreement with creditors, not a court or BIA process |
| What it covers | Usually unsecured debts such as cards and personal loans |
| What you pay | The full principal, often with interest reduced or waived by creditors |
| Length | Typically up to about five years |
| Credit effect | Noted on your credit report; cards usually closed |
| Risk | Creditors are not obliged to agree; no legal stay of collection |
Look for an agency affiliated with Credit Counselling Canada or a provincial non-profit network, and be wary of for-profit "debt relief" companies that charge large upfront fees and promise to "settle" debts.
Option 4: a consumer proposal
A consumer proposal is a formal, legally binding offer to your creditors under Division II of Part III of the BIA, made through a Licensed Insolvency Trustee (LIT), who is licensed by the federal Office of the Superintendent of Bankruptcy (OSB).
| Feature | Consumer proposal |
|---|---|
| Eligibility | Individual with total debts of $250,000 or less, excluding debts secured by your principal residence |
| What you pay | An amount agreed with creditors, often less than the full debt, in payments or a lump sum |
| Maximum length | 5 years |
| Legal protection | Once filed, most unsecured creditors must stop collection, lawsuits and wage garnishment |
| Interest | Stops on unsecured debts included in the proposal |
| Assets | You generally keep your assets, unlike in some bankruptcies |
| Credit effect | Recorded on your credit report for a period after completion |
| Fees | Trustee fees are set by federal rules and paid out of the proposal payments |
Creditors can vote on the proposal; if enough do not object, it is accepted. If it is rejected, you can revise it or consider other options. Secured debts, such as a car loan, are usually dealt with separately: to keep the car you keep paying that loan. Certain debts, such as court fines and government student loans, may not be discharged. For student loans this applies if you are still a student or ceased to be a full- or part-time student less than seven years before filing (Bankruptcy and Insolvency Act s. 178(1)(g)); after five years a court can grant hardship relief.
Illustrative example. You owe $38,000 in unsecured debts: $22,000 on a personal loan and $16,000 on cards, and cannot afford the roughly $1,000 a month it would take to clear them in four years. A trustee might help you propose, say, 60 monthly payments of $400, totalling $24,000. Whether creditors accept depends on what they would receive in a bankruptcy and on your income; the figures here are hypothetical.
Option 5: bankruptcy
Bankruptcy, also handled by an LIT under the BIA, releases most debts but can involve giving up non-exempt assets and making payments based on income for a period. The credit impact is longer than for a proposal. A trustee must review the alternatives with you; the first meeting is usually free.
What not to do
- Do not take a high-cost or payday loan to make loan payments; see payday loans.
- Do not pay a "debt settlement" company an upfront fee before checking what it can legally do; only an LIT can file a consumer proposal.
- Do not ignore court documents: deadlines matter.
- Do not move unsecured debt onto your home without understanding the risk.
Frequently asked questions
Will a lender sue me if I stop paying?
A lender can sue for the balance and, with a judgment, seek wage garnishment or other enforcement under provincial law. Talking to the lender early, or filing a consumer proposal, can avoid this.
Does credit counselling hurt my credit?
Getting advice does not. Entering a debt management program is usually noted on your credit report, and accounts in the program are often closed. A consumer proposal or bankruptcy has a larger, longer effect.
Can I include a co-signed loan in my consumer proposal?
You can include your share of the debt, but the co-signer remains liable to the lender. Discuss this with the trustee and the co-signer.
How do I find a Licensed Insolvency Trustee?
The OSB keeps a public search of licensed trustees. Make sure the person you meet is an LIT, not an unlicensed intermediary.
Sources
- Office of the Superintendent of Bankruptcy — consumer proposals, bankruptcy and finding a Licensed Insolvency Trustee
- Justice Laws Website — Bankruptcy and Insolvency Act, Part III, Division II
- Credit Counselling Canada — non-profit credit counselling agencies
- Financial Consumer Agency of Canada — managing debt and getting help
