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Published October 12, 2021

How to Get Out of Debt

Canadian debt relief options like credit counselling and consumer proposal are ways to get out of serious debt and improve your financial situation.

Getting into debt is as simple as borrowing money from a person or entity under the agreement that you’ll pay it back. Take on too much debt, and it could have a detrimental effect on your credit score, make it difficult to get a mortgage or car loan, and even jeopardize your ability to afford food and housing. The good news is that it’s possible to get out of debt, even if it feels overwhelming right now.

There are several ways to get out of debt, including budgeting, reduced spending, credit counseling, debt settlement, and consumer proposals. Choosing the right method can help you significantly improve your financial situation.

Before we take a look at some ways to get out of debt, let’s examine how you can actually tell whether you’re in a concerning amount of debt in the first place.

» MORE: What is debt?

When to seek help with debt

The simplest way to determine how much debt you’re in is to calculate your debt-to-income ratio. You can do this by dividing your monthly total debt payments by your gross monthly income. Then, multiply the result by 100 to get a percentage.

The resulting percentage is your debt-to-income ratio, an expression of how much monthly debt you have in relation to your monthly income.

A high debt-to-income ratio, generally thought of as 43% or more, is an indicator that a significant portion of your monthly income is being used to pay debts. However, there are even more obvious indicators that you are in a lot of debt and may need to reach out for help:

  • You’re only able to make the minimum payments on credit card debt.
  • You have difficulty paying your bills on time.
  • Collection agencies are calling or you are receiving “past due” notices.
  • You’re surviving financially on credit.
  • You feel stressed or anxious about your debt on a daily basis.

If you’re experiencing one or more of the above circumstances, and you’ve been unable to get out of debt on your own, there are some relief options available in Canada that you may want to consider.

» MORE: How to get out of credit card debt

Debt relief options in Canada

The right debt relief option for you will depend on your personal circumstances. Here are a few examples of what’s available.

Debt consolidation

If you have a number of different unsecured debts, such as credit cards or payday loans,  debt consolidation can combine it into a single loan so you only have to make one payment towards it every month. You can consolidate debt in several different ways, including a home equity loan (if you’re a homeowner) or a personal loan. Whichever method you choose, the concept is the same: you take out a new loan for the total value of your combined outstanding debts, then use the loan to pay them off. Then you’re left with a single loan on which to make payments, typically at a lower interest rate than the rate you were paying for all your individual debts.

To qualify for a debt consolidation loan, you’ll need to meet credit score requirements and the amount of your debt must not exceed loan limits set by the lender.

Credit counselling

If you want to learn strategies for managing your debt, deciding which debt repayment strategy is right for you, or negotiating with creditors, consider a credit counsellor. Be aware that not all credit counsellors are objective or upstanding, however. Look for an accredited, non-profit credit counselling agency, and investigate their reputation and customer reviews before agreeing to work together.

Debt settlement

Debt settlement is the process of negotiating with your creditors to eliminate your debt in exchange for a lump sum of money, usually less than the total amount that you owe. In Canada, this process is typically managed by a debt settlement company. These companies make money by charging their clients fees, which may be have to be paid upfront or monthly, even if the negotiations are ultimately unsuccessful.

Creditors are not required to work with debt settlement companies, but if an agreement is reached, you’ll be required to pay the negotiated amount in a lump sum to your settlement company. When choosing a debt settlement company, read any contracts carefully, and find out if any consumer complaints have been filed against the company.

Consumer proposal

A consumer proposal is a debt relief solution provided by the Canadian federal government. It’s a legally binding agreement that must be facilitated by a licensed bankruptcy and insolvency trustee. A consumer proposal is a negotiated settlement through which you pay a percentage of what you owe in exchange for full forgiveness of your unsecured debts.

While a consumer proposal will cause your credit score to decrease significantly, you get to keep your assets (unlike when you declare bankruptcy). Plus, the payments are interest free and spread over five years. The cost of a consumer proposal depends on your income and the amount you owe. A consumer proposal will stop any legal proceedings against you, as long as you satisfy the conditions of the agreement.


Bankruptcy is a legal process whereby you declare yourself unable to repay your unsecured debts, and are absolved of your obligation to do so — though you will have to pay for the bankruptcy itself. To file for bankruptcy, you must work with a licensed bankruptcy and insolvency trustee, and you may have to disclose and surrender assets, give up your credit cards and attend credit counselling. Bankruptcy will have a negative impact on your credit score and may remain on your credit file for up to seven years.

About the Author

Aaron Broverman

Aaron Broverman has been a personal finance journalist for over a decade. His work has appeared on such outlets as Yahoo Finance Canada, Bankrate and, Money Under 30, Wealth Rocket, and This former Toronto transplant via Vancouver now lives in Waterloo with his wife and son.


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