Debt relief Canada: 5 proven options to reduce your debt

Dealing with debt?

Canada’s cost squeeze is real: consumer insolvencies jumped 20.5% from December to January, and non-mortgage debt now averages $21,931 per person. Minimums feel like a treadmill and collection calls are circling — but don’t worry, we’re not here to lecture you: what you need is a plan.

Move early and you can cut rates, calm the chaos, and protect your assets (yes, including your home). This guide will help you figure out how to do that:

• The 5 proven paths — what they are, who they fit, how they affect your credit, and what they really cost.
• A quick-read comparison so you can pick a lane with confidence.
• A homeowner’s shortcut to cheaper money using home equity (without selling).
• Red-flag scanner to avoid debt-relief scams.
• Bounce-back blueprint to rebuild credit after you choose a path.

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By the way — are you a homeowner? Don’t let debt decisions cost you your house. Lotly helps Canadians use home equity to replace multiple high-interest bills with one secure payment using a straightforward review that counts income sources banks ignore. Find out how we help homeowners save an average of $1,200 per monthly payment via debt consolidation by booking a free consultation.

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What is debt relief and who needs it in Canada?

Debt relief encompasses various strategies and programs designed to help individuals manage overwhelming debt. These solutions range from consolidating multiple payments into one to negotiating reduced payoff amounts with creditors.

Recent statistics show Canadian consumer insolvencies rose by 20.5% from December 2024 to January 2025, with 11,196 filings—about 361 per day. Total consumer debt reached $2.5 trillion at the end of 2024, with the average Canadian carrying $21,931 in non-mortgage debt. These numbers highlight a growing need for effective debt relief solutions.

You might need debt relief if you're experiencing one or more of the following:

• Struggling to make minimum payments on credit cards and loans
• Using one form of credit to pay another
• Receiving collection calls or facing legal action from creditors
• Feeling overwhelmed by managing multiple debt payments
• Seeing your credit score decline due to high utilization or missed payments

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Understanding your debt relief options in Canada

When facing financial challenges, it's crucial to understand all available options before making a decision. Each debt relief solution offers different benefits and drawbacks depending on your specific situation, amount of debt, and long-term financial goals.

Let's explore the five main debt relief options available to Canadians, including their processes, eligibility requirements, and impacts on your financial future.

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Debt consolidation

Debt consolidation involves combining multiple debts into a single loan, ideally with a lower interest rate. This approach simplifies your finances by replacing numerous payments with one monthly obligation while potentially reducing the total interest paid over time.

For many Canadians, debt consolidation serves as the first step toward regaining financial control without the more serious credit implications of formal insolvency options.

How debt consolidation works:

• You take out a new loan large enough to pay off your existing debts
• The new loan pays off your multiple high-interest debts (credit cards, personal loans, etc.)
• You make a single monthly payment on the new loan, typically at a lower interest rate

Types of debt consolidation:

• Unsecured consolidation loans: Personal loans from banks or credit unions that don't require collateral but typically need good credit scores
• Secured home loans: Loans that use your home equity as collateral, often offering lower interest rates regardless of credit score (we’ll talk more about this later).
• Balance transfer credit cards: Cards with low introductory rates for transferring existing credit card balances
• Lines of credit: Revolving credit accounts that allow flexible borrowing and repayment

Pros of debt consolidation:

• Simplifies finances with one payment instead of multiple
• Can lower overall interest rates and monthly payments
• No immediate negative impact on credit score if payments are made on time
• You maintain control of your assets
• Avoids the stigma of formal insolvency options

Cons of debt consolidation:

• Requires sufficient creditworthiness to qualify for traditional options
• May extend the total repayment period
• Doesn't reduce the principal amount owed
• Secured options put assets at risk if payments aren't made

Impact on credit score: Debt consolidation generally has minimal negative impact on your credit score if payments are made on time. In fact, reducing credit card utilization through consolidation may actually improve your score over time.

Eligibility requirements: For traditional bank consolidation loans, you typically need:

• Good to excellent credit score (usually 650+)
• Stable income
• Manageable debt-to-income ratio

For Ontario homeowners, Lotly's secured home loans offer a practical debt consolidation solution by allowing you to replace multiple high-interest debts with one manageable monthly payment. Unlike traditional banks that may reject applicants based on credit score alone, Lotly welcomes diverse credit scores and income types, making this option accessible to homeowners who have been turned down elsewhere.

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Credit counselling and debt management plans

Credit counselling provides professional guidance on managing debt and creating sustainable budgets. When paired with a Debt Management Plan (DMP), it offers a structured approach to debt repayment without the legal implications of formal insolvency proceedings.

How credit counselling and DMPs work:

• You meet with a non-profit credit counsellor who reviews your financial situation
• The counsellor helps create a budget and suggests debt management strategies
• If appropriate, they propose a Debt Management Plan where you make a single monthly payment to the agency
• The agency distributes payments to your creditors according to negotiated terms
• Most DMPs last 3-5 years until debts are fully repaid

Pros of credit counselling and DMPs:

• Professional guidance on budgeting and financial management
• Potential interest rate reductions (often creditors waive or reduce interest)
• Consolidated payment without taking on new debt
• Stops collection calls once creditors accept the plan
• Less impact on credit than formal insolvency options

Cons of credit counselling and DMPs:

• Requires regular income to make monthly payments
• All creditors must agree to the plan
• Still repay 100% of principal debt
• May appear on credit report during the program
• Monthly administration fees (though typically modest)

Impact on credit score: A DMP may be noted on your credit report while active, potentially with an R7 rating (debt settlement program). However, this impact is generally less severe and shorter-lasting than formal insolvency options.

Eligibility requirements:

• Stable income sufficient to make regular payments
• Willingness to follow a strict budget
• Primarily unsecured debts (credit cards, personal loans, etc.)
• Creditors must agree to participate in the plan

Costs involved: Non-profit credit counselling agencies typically charge:

• Initial consultation fee: Often free
• Monthly administration fee: Usually around $50-75
• Setup fee: Approximately $50-100

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Consumer proposals

A consumer proposal is a legally binding debt settlement option unique to Canada. It allows you to offer creditors a proposal to pay a percentage of your debt, extend the repayment period, or both. This option has become increasingly popular, representing 78.9% of Canadian insolvency filings in January 2025.

How consumer proposals work:

• You work with a Licensed Insolvency Trustee (LIT) to determine what you can reasonably afford to pay
• The LIT files a proposal offering to pay creditors a percentage of what you owe (often 30-50%)
• If the majority of creditors accept, the proposal becomes binding on all unsecured creditors
• You make fixed monthly payments to the LIT, who distributes funds to creditors
• Once all payments are complete (typically over 3-5 years), the remaining debt is legally discharged

Pros of consumer proposals:

• Reduces debt principal (typically by 50-80%)
• Stops all interest charges from the filing date
• Provides immediate legal protection from creditors
• Fixed monthly payments with no interest
• You keep your assets, including your home
• No monthly income reporting requirements

Cons of consumer proposals:

• Significant negative impact on credit rating (R7 for 3 years after completion)
• Must be able to offer creditors more than they would receive in bankruptcy
• All unsecured creditors must be included
• Cannot include secured debts like mortgages
• Maximum unsecured debt limit of $250,000 (excluding mortgage)

Impact on credit score: A consumer proposal results in an R7 rating on your credit report, which remains for either 3 years after completion or 6 years after filing, whichever comes first.

Eligibility requirements:

• Canadian resident or property owner
• Insolvent (unable to pay debts as they come due)
• Unsecured debts between $1,000 and $250,000 (excluding mortgage)
• Sufficient income to make proposal payments

Costs involved:

• Filing fees: Set by the government
• Administrative fees: Typically 20% of amounts distributed to creditors
• Counselling fees: Mandatory credit counselling sessions

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Debt settlement

Debt settlement involves negotiating directly with creditors to pay less than the full amount owed, typically in a lump sum. Unlike consumer proposals, debt settlement is not a formal legal process and doesn't provide the same protections.

How debt settlement works:

• You (or a debt settlement company) contact creditors to negotiate reduced payoff amounts
• If creditors agree, you make a lump-sum payment or a series of payments
• The creditor considers the debt satisfied and stops collection activities
• The settled debt is typically reported as "settled" on your credit report

Pros of debt settlement:

• Can reduce the principal amount owed
• Faster resolution than formal insolvency options
• No court involvement
• Can target specific problematic debts
• More flexible than formal programs

Cons of debt settlement:

• No legal protection during negotiations
• Creditors are not obligated to negotiate
• May trigger tax consequences for forgiven debt
• Significant negative impact on credit
• Often requires lump-sum payments
• Potential for scams with for-profit debt settlement companies

Impact on credit score: Debt settlement typically results in a negative credit report entry showing the debt was "settled for less than the full amount." This negative mark can remain for up to 6-7 years.

Eligibility requirements:

• No formal requirements, but generally:
• Accounts should be delinquent or in collections
• You need access to funds for lump-sum settlements
• Best for specific problematic debts rather than overall debt problems

When to consider this option:

• When you have access to a lump sum but not enough to pay debts in full
• When dealing with a small number of problematic debts
• When you're not eligible for other debt relief options
• When you need a faster resolution than formal insolvency options

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Bankruptcy

Bankruptcy is a legal process that provides a fresh financial start by eliminating most unsecured debts when you cannot reasonably pay them. While often viewed as a last resort, bankruptcy provides immediate legal protection and can be the most appropriate solution in certain circumstances.

How bankruptcy works in Canada:

• You work with a Licensed Insolvency Trustee to assess your situation
• The LIT files bankruptcy paperwork with the government
• You surrender non-exempt assets to the trustee
• You complete mandatory credit counselling sessions
• You make monthly payments based on your income (if applicable)
• After 9-21 months (for first-time bankruptcy), you receive a discharge

Pros of bankruptcy:

• Eliminates most unsecured debts
• Provides immediate legal protection (stay of proceedings)
• Stops wage garnishments and collection actions
• Relatively quick process (as little as 9 months for first bankruptcy)
• Clear legal framework with predictable outcomes

Cons of bankruptcy:

• Surrender of non-exempt assets
• Most severe impact on credit (R9 rating for 6-7 years)
• Monthly income reporting requirements
• Potential for surplus income payments
• Some debts cannot be discharged (recent student loans, court fines, etc.)
• Public record of bankruptcy

Impact on credit score: Bankruptcy results in an R9 rating (the most severe) on your credit report, which remains for 6-7 years after discharge for a first bankruptcy.

Eligibility requirements:

• Canadian resident or property owner
• Insolvent (unable to pay debts as they come due)
• Minimum $1,000 in unsecured debt
• Not currently in an undischarged bankruptcy

Costs involved:

• Base contribution: Approximately $1,800-2,500
• Surplus income payments: Based on income exceeding government thresholds
• Administrative fees: Set by the government
• Counselling fees: Mandatory credit counselling sessions

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Comparing debt relief options: which is right for you?

Choosing the right debt relief option depends on your specific financial situation, the types of debt you have, your income stability, and your long-term goals. The following comparison table highlights key differences to help guide your decision:

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Using home equity for debt relief in Canada

For homeowners, particularly in Ontario, leveraging home equity can be one of the most effective debt relief strategies. Home equity — the difference between your home's current value and your mortgage balance — represents a valuable financial resource that can be accessed through various lending products.

Using home equity for debt consolidation offers several distinct advantages over other debt relief options, especially for those who have been building equity over several years.

How home equity can be used for debt consolidation:

• Calculate your available equity: Subtract your current mortgage balance from your home's estimated market value
• Determine how much equity you can access: Typically up to 80% of your home's value minus your existing mortgage
• Apply for a secured home loan or HELOC: Work with a lender that specializes in home equity solutions
• Use the funds to pay off high-interest debts: Eliminate credit cards, personal loans, and other high-interest obligations
• Make regular payments on your new loan: Enjoy the benefits of a single payment, often at a much lower interest rate

Benefits of using home equity vs. unsecured options:

• Lower interest rates: Secured home loans typically offer rates significantly lower than credit cards (8-9% vs. 20%+)
• Higher approval likelihood: Using your home as collateral increases approval chances even with challenged credit
• Larger loan amounts: Access to more substantial funds to address all debts at once
• Longer repayment terms: Extended payment periods can reduce monthly obligations
• Potential tax benefits: In some cases, interest on home equity loans may be tax-deductible (consult a tax professional)

By the way — Lotly's secured home loan process helps Ontario homeowners unlock funds from their existing home equity, making it easier to tackle overwhelming debt without relying on high-interest personal loans or credit cards. Our flexible approach considers your unique financial situation rather than applying rigid qualification criteria, and we help homeowners save an average of $1,200 in monthly payments.

Considerations before using home equity:

• Risk to your home: Since your property secures the loan, falling behind on payments could put your home at risk
• Closing costs and fees: Factor in appraisal fees, legal costs, and other expenses
• Long-term financial impact: Consider how the additional mortgage debt affects your overall financial picture
• Root causes of debt: Address the behaviors that led to debt accumulation to avoid repeating the cycle
• Home value fluctuations: Be aware that housing markets can change, affecting your equity position

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Government programs and resources for debt relief in Canada

The Canadian government offers several programs and resources to help citizens manage debt and improve their financial situation. While there isn't a single comprehensive "government debt relief program," these resources provide valuable assistance and protection for those struggling financially.

Official government resources:

• Office of the Superintendent of Bankruptcy (OSB): Oversees the insolvency system in Canada and provides information on bankruptcy and consumer proposals
• Financial Consumer Agency of Canada (FCAC): Offers educational resources on debt management, credit, and financial planning
• Canada Revenue Agency (CRA) payment arrangements: Allows for flexible payment plans for tax debts
• Canada Student Loan forgiveness and repayment assistance: Programs to help manage student loan debt for eligible borrowers

Provincial assistance programs:

• Ontario Electricity Support Program: Provides bill payment assistance for low-income households
• Emergency assistance programs: Most provinces offer emergency financial assistance for those in crisis
• Legal aid services: Free or subsidized legal advice for financial matters in most provinces
• Housing stability programs: Assistance to prevent eviction or foreclosure in many jurisdictions

Free counseling services:

• Credit Counselling Canada: Network of accredited non-profit credit counseling agencies
• Community financial counseling services: Available through various community organizations
• Financial literacy workshops: Offered through libraries, community centers, and online

Warning signs of debt relief scams:

• Guarantees to settle debt for "pennies on the dollar" without assessing your situation
• Requests for upfront fees before providing any services
• Promises to repair or "fix" your credit score quickly
• Instructions to stop communicating with creditors without legal protection in place
• Claims of "government programs" or "new laws" that eliminate debt
• Pressure tactics or urgency to sign up immediately

When seeking debt relief assistance, always verify the credentials of any organization. Licensed Insolvency Trustees are regulated by the government and must adhere to strict ethical standards. Similarly, legitimate credit counseling agencies are typically non-profit organizations with certified counselors.

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How to choose the right debt relief option

Selecting the most appropriate debt relief strategy requires an honest assessment of your financial situation and a clear understanding of your long-term goals. The following framework can help guide your decision-making process.

Questions to ask yourself:

• How severe is my debt problem? Calculate your debt-to-income ratio (monthly debt payments divided by monthly income)
• What types of debt do I have? Different solutions work better for different debt types
• Do I own a home with equity? This opens additional options like secured home loans
• How important is protecting my credit score? Some solutions have more significant credit impacts than others
• Do I need immediate relief, or can I manage current payments? This affects whether you need legal protection
• Is my income stable and sufficient? Some options require regular payments over time
• What assets do I want to protect? Certain solutions may put assets at risk

When to seek professional help:

• When you're unable to make minimum payments on debts
• When creditors are threatening legal action or garnishment
• When you're using credit to pay for necessities
• When you're unsure which debt relief option best fits your situation
• When you need legal protection from creditors
• When your debt-to-income ratio exceeds 40%

Red flags to watch for in debt relief services:

• Guarantees or promises that sound too good to be true
• High-pressure sales tactics or urgency to sign up
• Lack of transparent fee structures
• Unwillingness to explain all available options
• No licensed professionals on staff
• Poor reviews or complaints with the Better Business Bureau

Steps to take before committing to any option:

• Gather complete financial information: List all debts, interest rates, and monthly payments
• Create a realistic budget: Understand your income and expenses to determine payment capacity
• Check your credit report: Review for accuracy and understand your current credit position
• Research multiple providers: Compare services, fees, and approaches
• Understand all terms and conditions: Know exactly what you're agreeing to
• Consider long-term implications: How will this decision affect your financial future?

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Rebuilding your finances after debt relief

Successfully completing a debt relief program marks the beginning of your financial recovery journey, not the end. With deliberate planning and consistent habits, you can rebuild your credit and establish a stronger financial foundation.

Timeline for credit recovery:

The timeline for credit recovery varies depending on which debt relief option you choose:

• Debt consolidation: Credit can begin improving within 3-6 months of consistent payments
• Credit counseling/DMP: Credit typically begins recovering within 6-12 months after program completion
• Consumer proposal: Credit rebuilding can begin immediately after completion, with significant improvement possible within 1-2 years
• Bankruptcy: Serious credit rebuilding typically begins 1-2 years after discharge, with substantial improvement possible by years 3-4

Strategies for rebuilding credit:

• Secured credit card: Obtain a secured credit card that reports to credit bureaus
  
  • Make small, regular purchases
  • Pay the balance in full each month
  • Keep utilization under 30% of available credit
• Credit builder loan: Consider products specifically designed for credit rebuilding
  
  • Make all payments on time
  • These loans report positive payment history to credit bureaus
  • Some financial institutions offer programs specifically for post-bankruptcy clients
• Become an authorized user: Ask a family member with good credit to add you as an authorized user
  
  • Their positive payment history can help your credit
  • Ensure the card issuer reports authorized user activity to credit bureaus
• Monitor your credit report: Regularly check your credit reports from both major bureaus
  
  • Dispute any inaccuracies promptly
  • Verify that completed debt programs show proper status
  • Track your progress as your score improves

Budgeting tips to avoid future debt:

• Create a zero-based budget: Assign every dollar of income to a specific purpose
  
  • Use budgeting apps or spreadsheets for tracking
  • Include categories for savings and debt prevention
  • Review and adjust monthly
• Build an emergency fund: Start with a goal of $1,000, then work toward 3-6 months of expenses
  
  • Keep these funds in a separate, accessible account
  • Replenish immediately after using for emergencies
  • This prevents reliance on credit during unexpected events
• Use the cash envelope system: For categories where overspending is tempting
  
  • Withdraw cash for variable expenses like groceries and entertainment
  • When the envelope is empty, stop spending in that category
  • This creates physical awareness of spending limits
• Implement the 24-hour rule: For non-essential purchases over $100
  
  • Wait 24 hours before completing the purchase
  • Ask if the item is a want or a need
  • Consider how many work hours the purchase costs you

Resources for ongoing financial education:

• Financial literacy courses: Many community colleges and online platforms offer free or low-cost courses
• Government resources: The Financial Consumer Agency of Canada provides excellent educational materials
• Personal finance books and podcasts: Continue expanding your financial knowledge
• Non-profit credit counseling: Many agencies offer free workshops even after debt relief
• Online communities: Forums like r/PersonalFinanceCanada provide peer support and advice

Remember that rebuilding after debt relief is a marathon, not a sprint. Celebrate small victories, learn from setbacks, and maintain focus on your long-term financial health. With consistent effort and smart habits, you can emerge from debt relief stronger and more financially resilient than before.

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Ready to take control of your debt? Lotly can help

Taking the first step toward debt relief is often the hardest part, but it's also the most important. Now that you understand the available options in Canada, you can make an informed decision that aligns with your specific financial situation and goals.

Key takeaways from this guide:

• Consider your home equity as a powerful tool. If you're an Ontario homeowner, using your home equity through Lotly's secured home loan can help you consolidate high-interest debts into one manageable payment at a significantly lower rate.
• Compare all available options. Each debt relief solution—from consolidation to consumer proposals to bankruptcy—has distinct advantages and disadvantages depending on your debt level, income stability, and long-term goals.
• Look beyond immediate relief. Choose a debt solution that not only addresses your current financial challenges but also provides a clear path to rebuilding your credit and financial health.

P.S. — If you're ready to see your options, Lotly makes it simple. One form, real solutions, and a team that's on your side. Book a free consultation to see how you can get started today.

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