This debt repayment plan can shield clients from creditors

There are many debt relief options available to Canadians – consolidation loans, debt management programs, consumer proposals and bankruptcies, but one lesser-known solution is an Orderly Payment of Debts (OPD), also called a Consolidation Order.

The reason this debt relief tool is often overlooked it’s not available across the entire country. You may only file an OPD if you reside in Alberta, Saskatchewan, PEI, and Nova Scotia.

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The legislation that allows for OPDs is Section X of the Bankruptcy and Insolvency Act. The procedure is designed to provide an alternative to filing for bankruptcy.

Briefly, here is how the OPD process works:

• The client applies for an OPD court order.
• The court-ordered repayment plan bears interest at the standard rate of 5%.
• The plan also includes a Stay of Proceedings, similar to the automatic provisions of a bankruptcy filing or a consumer proposal. The stay means your client’s creditors can’t pursue independent collection or legal action while the OPD is in place.

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While uncommon, there are cases when filing for an OPD makes sense. For instance, if your client can repay his or her debts in full, but could use relief from higher interest charges, then an OPD is an option if he or she lives in one of the above provinces. Before deciding to file an OPD, your client should consider whether or not they might qualify for a consolidation loan instead. The OPD likely has a lower interest rate, but if your client qualifies for a consolidation loan at a reasonable rate of interest, then their credit report and history (and therefore their future ability to borrow) may be better served by the loan. OPDs are reported as settlement options on your client’s credit report, similar to the way that debt management programs and consumer proposals are reported.

Let’s look at an example. Bob owes a total of $35,000 on various credit cards, lines of credit and loans. His minimum monthly payments are costing him somewhere around $1,200 to $1,500. Of that, $600 is interest. At that rate, it will take Bob a long time to repay this debt.

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A consolidation loan at his bank might charge 8% interest, though it could be more or less depending on Bob’s overall financial health. Assuming an 8% interest rate, his new payment would be $730 a month for five years. By comparison, an OPD for the same debt would charge 5% interest, resulting in a payment of $660 per month for five years.

From a cash flow perspective, Bob will be better off with an OPD. However a debt consolidation loan would have less of an impact on his credit report. If he can afford the debt consolidation loan payments, that may be the better option if he thinks he’ll need access to credit later in life. Bob should also consider filing either a consumer proposal or bankruptcy. If he can afford to repay his debts in full, then an OPD or debt consolidation loan may be a good choice. If, however, a review of his budget shows there’s significant risk that Bob won’t be able to keep up with the reduced payments even under an OPD, a consumer proposal may be a better alternative. The main reason is under a consumer proposal (unlike a debt consolidation loan, OPD or debt management plan with a credit counseling agency) the debtor gets not only interest relief but also debt relief. By reducing the amount of principle, the debtor benefits from even lower monthly payments.

Nationally available tools can offer similar help to OPDs. Effectively, a client with an OPD has a similar to someone using a credit counselor’s debt management plan. Both result in interest relief but require the debt to be repaid in full. The primary benefit of an OPD over a debt management plan is that an OPD also offers a Stay of Proceeding against creditor actions such as a wage garnishment. A consumer proposal or bankruptcy would offer relief from creditor actions too, so indebted Canadians in provinces that don’t offer OPDs still have tools to lessen their debt burdens.

Ted Michalos

Tax & Estate

Ted Michalos , B.A., CPA, is a Licensed Insolvency Trustee and co-founder of Hoyes, Michalos & Associates Inc. in Ontario, Canada.