Knowing Your Options: Self-Employed Debt Management Plan

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PUBLISHED BY Alwin Wong / February 5, 2021

Struggling with debt? Here’s what you need to know about debt management plans for self-employed workers

Self-employment can often lead independent workers into a precarious financial situation. While there are a lot of benefits to self-employment, it is not uncommon to experience periods where your costs surpass your earnings, and you need to take on a low interest self employment loan.

Self-employed debt can also be more complicated, as you aren’t able to rely on a consistent and predictable income, and can be especially challenging if your reported earnings are lower than your actual take-home pay.

For example, self-employed workers might try to get creative with their tax filings to make it appear they’ve earned less on paper, thus reducing their tax burden. This approach is strongly discouraged, not only because it is dishonest and illegal, but also because it will impact their ability to qualify for loan products in the future. When a lender considers your application they will verify your earnings records, and if they discover a high debt-to-income ratio for self-employed workers—that is, that they own a lot compared to how much they report earning— the lender will be much less likely to provide that loan, or require a much higher interest rate.

If you find yourself in debt as a self-employed worker, it’s important to chart your path back to becoming debt free. Creating a debt management plan for self-employed workers is often the simplest way to get there.

What is a Debt Management Plan for Self Employed Workers?

Becoming a freelance gig worker

A debt management plan is an agreement between you and your creditors that outlines a plan for paying back your loans in full at a reasonable and affordable rate, with borrowing additional funds. It consolidates all debts into a single, manageable monthly payment plan, often with a reduction or freezing of interest rates.

Debt management plans often last five or six years, but allow the borrower to retain control of their assets and continue operating their business as they work towards eliminating their existing debt. It can also help them avoid bankruptcy or a consumer proposal, which could have more devastating and long lasting financial implications.

What’s the difference between a Debt Management Plan and a Consumer Proposal or IVA?

A debt management plan is different from a consumer proposal in that it is not legally binding and does not need to be approved by a court. Consumer proposals—sometimes referred to as individual voluntary agreement, or IVAs, outside of Canada—typically require the creditor to agree to write off the outstanding balance on your unsecured debt, while a debt management plan typically requires the borrower to repay their loans in full.

A consumer proposal or IVA, if self-employed, can be an effective last resort to avoiding bankruptcy. It allows you to continue operating your independent business without the restrictions imposed by bankruptcy.

While Consumer proposals automatically include creditor protection and can stop wage garnishments, a debt management plan will only include those benefits if the creditor agrees to them. Furthermore, while you can use a consumer proposal to deal with the Canadian Revenue Agency (CRA), the agency does not allow Canadians to pursue a debt management plan to repay their taxes, as it is not legally binding.

Both a consumer proposal and a debt management plan for self-employed workers, however, can be an effective means for getting yourself out of debt and getting your finances back on track.

How do you make a debt management plan if you’re self-employed?

In order to create a debt management plan you must first meet with a credit counsellor, who will review your debt-to-income ratio. The credit counsellor will determine whether you qualify for a debt management plan, help you create a manageable monthly payment schedule.

If you are able to agree on a manageable repayment plan the counsellor will then take that plan to your creditors and negotiate a settlement that satisfies their requirements. If they are successful and all parties agree on a reasonable repayment plan you will begin making payments directly to the credit counsellor, who will distribute the funds according to the terms of the agreement. Once you reach the end of the term, assuming you are able to stick to the debt management plan, you will be debt free.

Where do I Find a Loan Specifically Designed for Self Employed Workers?

woman and phone

Moves Financial is among the best lenders for self-employed workers, as it is designed specifically to meet their needs. Those who work in the gig economy for platforms like Uber, Lyft, Skip the Dishes, Instacart and Doordash can get access to loan products that can help improve their financial standing and their credit rating. While self employed workers often struggle to get access to traditional financial products like loans, their low-interest loans are designed specifically for those with a fluctuating income.

Alwin Wong

Alwin is the Growth Manager at Moves and a part-time freelance photographer. With the rise of the gig economy, he is excited by a world where people can have greater flexibility over their work and challenge the norms of having a traditional 9-to-5 job. Alwin is also an avid travel enthusiast and Toronto Raptors basketball fan.

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