Many Canadians want to get out of debt without filing anything formal – no bankruptcy, no consumer proposal, no court process, and no trustee involvement. That’s where informal debt settlement comes in.
Informal debt settlement means negotiating directly with your creditors to accept less than the full amount you owe – without filing a formal insolvency process. It can work, especially for older debts or accounts already in collections. But it can also be complicated, risky, and unpredictable – which is why understanding how it works is essential before you try it.
This guide walks you through exactly how informal settlement works in Canada, step-by-step. You’ll learn:
- Which debts you can settle informally
- How much creditors typically accept
- How to contact creditors (with scripts and templates supplied)
- What to watch out for (legal risks and scam warnings)
- Case studies showing real outcomes
- When to consider alternatives like a consumer proposal (a much safer option if DIY negotiations fail)
By the end, you’ll know whether informal settlement is a realistic option for your situation – and what to do next if it isn’t.
What is informal debt settlement?
Informal debt settlement is a private negotiation between you and a creditor where you offer a lump-sum payment that is less than the full amount owing. If accepted, the creditor agrees to close the account and stop collections.
There is:
- No court filing
- No legal protection
- No Licensed Insolvency Trustee overseeing the deal
- No guarantee creditors will accept
It’s effectively a DIY negotiation.
For example:
Let’s say you owe $8,000 on a credit card.
You offer $2,800 as a one-time payment.
If your creditor agrees, they mark the debt as settled or “paid for less than full balance.”
Compared to consumer proposals, bankruptcy, or debt consolidation, informal settlement offers far less certainty and protection. For Canadians trying to settle debt without a Licensed Insolvency Trustee, informal settlement is often the first option explored.
| Option | Legal Protection | Stops Collections | Reduces Principal | Includes CRA Debt | Predictability | Credit Impact |
| Informal Debt Settlement | No | No | Sometimes | No | Low | Moderate–High |
| Consumer Proposal | Yes | Yes | Yes | Yes | High | Moderate |
| Debt Consolidation | No | No | No | No | Medium | Low–Moderate |
| Bankruptcy | Yes | Yes | Yes | Yes | High | High |
How does informal debt settlement work in Canada?
Informal debt settlement follows a predictable pattern. While the outcomes can vary, creditors tend to respond based on the risk, age of debt, and likelihood of repayment.
Step 1: Assess your debt
Start by listing:
- Each creditor
- Current balance
- Type of debt (credit card, loan, collection account)
- How long the account has been delinquent
Unsecured debts that are six months or more past due are typically more negotiable. According to the Financial Consumer Agency of Canada (FCAC), many lenders charge off accounts after roughly 180 days of non-payment, which is often when settlement discussions become more realistic.
Step 2: Prepare your settlement offer
Most informal settlements are lump-sum offers, not payment plans.
As a general rule:
- Older, charged-off debts = lower settlement ranges
- Newer debts = higher resistance
Canadian non-profit credit counselling organizations note that informal settlements may range from 20% to 80% of the original balance, depending on the creditor and the age of the debt. The Credit Counselling Society reports that settlements within this range are possible, with lower percentages typically tied to older accounts or significant financial hardship.
Step 3: Contact creditors (scripts provided in this guide)
Reach out to the original creditor or, if the account has been transferred, the collection agency handling it. Ask whether they are open to a lump-sum settlement and confirm the balance owing. Keep the conversation simple – don’t disclose your assets or banking details, and don’t make promises until terms are agreed in writing. Phone is often fastest, but email provides written proof.
Step 4: Get the agreement in writing
Before paying:
- Confirm the exact amount
- Confirm the account will be marked “settled” or “paid for less than full balance”
- Ensure the agreement is written (email or letter)
Step 5: Keep all documentation
Save:
- Settlement agreements
- Proof of payment
- Correspondence
Documentation is critical if disputes arise later.
What types of debt can be settled informally in Canada?
Debts that may be settled informally
- Credit cards
- Personal loans
- Lines of credit
- Collection accounts
These are typically unsecured debts, meaning there is no asset tied to them.
Debts that cannot be settled informally
- CRA tax debt
- Most government student loans
- Child support or spousal support
The Canada Revenue Agency (CRA) doesn’t accept informal settlements. Tax debt must be addressed through repayment arrangements or formal insolvency processes such as a consumer proposal.
How much will creditors settle for in Canada?
Many Canadians ask: “how much will creditors actually accept?”
While many settlements fall in the 20–60% range, outcomes can vary more widely depending on the age of the debt, the creditor, and individual circumstances.
Typical settlement ranges
- 20–30%: older collection accounts, low recoverability
- 30–50%: charged-off debts, moderate risk
- 50–60%: newer delinquent accounts
Canadian non-profit credit counselling organizations note that creditors may be more willing to negotiate after a debt has been charged off, since they’ve already recognized the loss.
Factors that affect acceptance
- Age of the debt
- Whether the debt is with the original lender or a collection agency
- Lump-sum availability
- Province and limitation periods
- Your financial situation and asset exposure
It’s important to note that there is no guaranteed acceptance, even within typical ranges.
What are the risks of informal debt settlement in Canada?
Statute of Limitations
Most provinces limit how long creditors can sue:
- Ontario, BC, Alberta: 2 years
- Several other provinces: up to 6 years
The FCAC clarifies that limitation periods don’t erase the debt, but they often influence creditor willingness to settle. Making a payment or acknowledging the debt can restart the limitation period, depending on the province.
When creditors refuse
Creditors may refuse if:
- The debt is recent
- You appear able to repay in full
- The account is secured
- Legal action is already underway
Scam avoidance
Be cautious of companies that:
- Guarantee results
- Charge large upfront fees
- Tell you to stop communicating with creditors
- Claim they can “erase” debt
Spergel regularly sees clients harmed by failed settlement attempts.
How does informal debt settlement affect your credit score in Canada?
Settled accounts typically appear as:
- “Settled”
- “Paid for less than full balance”
Under Canadian reporting rules, negative information – including settled accounts – typically remains on your credit report for up to six years.
Short-term credit scores often drop, but many Canadians rebuild over time – especially when settlement prevents further delinquencies.
Real examples of informal debt settlement in Canada
Scenario 1: Single credit card settled for 30%
Alex, in Ontario, had a $7,500 credit card that had been unpaid for over a year and sent to collections. With help from family, Alex offered a lump sum and the collection agency accepted 30% to close the account.
Outcome: settled notation; collections stopped.
Why it worked: old, unsecured debt already charged off.
Scenario 2: Partial settlements and proposal
Maya, in BC, owed $28,000 across three unsecured debts. She settled two accounts at reduced amounts but one major creditor refused.
Outcome: she filed a consumer proposal to legally resolve the remaining balance.
Why: informal settlements are not guaranteed with all creditors.
Scenario 3: CRA debt required formal solution
Samir owed $18,000 in taxes and tried to negotiate directly. The CRA does not accept informal settlements, so private negotiation wasn’t possible.
Outcome: a consumer proposal allowed him to include the tax debt and stop collections.
Key point: government debt often requires formal processes.
Scenario 4: Recent delinquency resulted in consolidation instead
Riley was only 60 days behind on $12,000 of debt. The creditor declined a reduced lump-sum because the debt was recent.
Outcome: a debt consolidation loan lowered his interest and made repayment manageable.
Lesson: informal settlement works best with older or charged-off debts.
What are the alternatives to informal debt settlement in Canada?
Informal debt settlement isn’t always successful, and it isn’t suitable for every type of debt. If negotiations fail – or if you need more certainty, legal protection, or the ability to deal with multiple creditors at once – it’s important to understand the formal debt relief options available in Canada. These alternatives can provide clearer timelines, stronger protection, and more predictable outcomes.
Consumer proposal
A consumer proposal is a legally binding solution administered by a Licensed Insolvency Trustee. According to the Office of the Superintendent of Bankruptcy, consumer proposals account for nearly 80% of consumer insolvency filings in Canada, representing 78.8% in 2024.
They:
- Stop collections and lawsuits
- Can reduce debts by up to 80%
- Include CRA debt
- Offer predictable payments
Debt consolidation
Consolidating multiple debts into a single loan combines several balances into one repayment, often with a lower interest rate or fixed schedule. While it can simplify payments and reduce interest costs, it does not reduce the total amount owed and typically requires sufficient credit or income to qualify.
Bankruptcy
Filing for bankruptcy in Canada is a legal process administered by a Licensed Insolvency Trustee that can eliminate most unsecured debts when repayment is no longer realistic. It provides immediate protection from creditors, but can have significant and long-lasting impacts on your credit and may involve asset and income reporting requirements.
Debt settlement templates and scripts
Sample letters, emails, and phone scripts you can use
If you decide to attempt an informal debt settlement, having the right wording matters. The templates below are designed to help you open a negotiation clearly and professionally, without admitting fault or making commitments before terms are agreed in writing.
These examples are for unsecured debts only and should be adapted to your situation.
Debt settlement letter template (lump-sum offer)
Use this when writing to a creditor or collection agency by mail or email.
I am currently experiencing financial hardship and am unable to repay the full balance of this account.
I would like to resolve this matter and can offer a one-time lump-sum payment of $____ as full and final settlement of the account, provided the balance is reported as settled or paid for less than the full amount owed.
Please confirm in writing whether this offer is acceptable and that no further balance will be owing once payment is made.
Tip: Do not send payment until you receive written confirmation of the settlement terms.
Phone call script: how to ask about a settlement
Phone calls are often the fastest way to determine whether a creditor is open to negotiation.
“I’m calling to ask whether you’re open to discussing a lump-sum settlement to resolve this account. I’m not able to repay the full balance, but I may be able to make a one-time payment if terms can be agreed in writing.”
If they ask for details you’re not ready to share:
“I’d prefer to review any settlement options in writing before discussing payment.”
Debt settlement email template
This can be used as a first contact or follow-up after a phone call.
I’m writing regarding the balance on my account. Due to financial hardship, I’m unable to repay the full amount.
I may be able to make a one-time lump-sum payment to settle the account, depending on the terms. Please let me know if you’re open to discussing a settlement and what information you require to proceed.
Important reminders before using these templates
- Always get settlement terms in writing
- Do not provide banking details until terms are confirmed
- Keep copies of all correspondence and proof of payment
- Understand that creditors are not required to accept informal settlements
When templates aren’t enough
If creditors refuse to negotiate, or if you’re dealing with multiple debts, government debt, or ongoing collection pressure, a consumer proposal may provide a more predictable and legally protected solution.
Informal debt settlement in Canada: FAQs
Is informal debt settlement legal in Canada?
Yes. Informal debt settlement is legal in Canada and involves negotiating directly with a creditor to accept less than the full amount owed. It is not, however, legally binding until payment is made, and creditors are not required to accept a settlement offer.
How much will creditors typically settle for in Canada?
Settlement amounts vary widely depending on the age of the debt, the creditor, and whether the account is in collections. Canadian non-profit credit counselling organizations note that informal settlements may range from 20% to 80% of the original balance, with outcomes depending on individual circumstances and creditor willingness.
Can CRA debt be settled informally?
No. Debts owed to the Canada Revenue Agency cannot be settled informally. Tax debt must be addressed through repayment arrangements or included in a formal insolvency process such as a consumer proposal or bankruptcy.
Is a consumer proposal better than informal settlement?
A consumer proposal may be a better option if you have multiple debts, need legal protection from creditors, or are dealing with government debt. Unlike informal settlement, a consumer proposal is legally binding and stops collection activity once filed.
Will settling a debt ruin my credit forever?
No. Settled accounts can negatively affect your credit score in the short term, but they do not stay on your credit report forever. Negative information typically remains for up to six years, after which it is removed, and many people are able to rebuild their credit over time.
Not sure which option is right for you?
Informal debt settlement can work in some situations – but it isn’t the right solution for everyone. If you’re unsure whether informal settlement, a consumer proposal, or another option makes the most sense for your situation, speaking with a Licensed Insolvency Trustee can help you understand your options clearly and without pressure.
At Spergel, consultations are confidential and judgment-free, and there’s no obligation to proceed. Book a free consultation to explore your options.
