Your personal finances can be tricky to manage. For many Canadians, maintaining a monthly cash-flow is a balancing act that can fall to pieces with an unexpected expense in the $200 range. So many of us have experienced it at some point, and the rest of us know someone who has. One missed bill payment can throw everything off track and launch us into a world of continual debt. In this world, we are often required to choose which debts we will pay and which ones we will allow to default. It is a scary place with substantial interest charges, constant collection calls, and sometimes lost wages. If you are struggling to manage multiple debts, if you are stuck paying high-interest rates, or if you cannot afford to repay your current obligations, take hope! This is for you.
Debt consolidation has been practiced by Canadians for many years as a strategic way to manage financial obligations, reduce costs, and pay off debt. In this article, we will explore different types of debt consolidation, looking at the pros and cons of each, and applying them to appropriate financial situations. If you are currently considering debt consolidation options for yourself, we invite you to reach out via phone, email or live chat. We will be happy to answer any questions related to your unique circumstances or set up a free consultation meeting with one of our Licensed Insolvency Trustees.
The Basics of Debt Consolidation
Debt consolidation started as a form of refinancing but has grown to include multiple solutions, including private programs and federally regulated solutions to bring together all of your unsecured debts into a single monthly payment. There are three main methods used to consolidate debt in Canada. Consumer proposals are regulated by the federal government and administered by Licensed Insolvency Trustees. With a consumer proposal, your debts can be combined and reduced by up to 70%. Another method is a debt management plan (DMP). These programs are administered by credit counselling agencies and allow you to repay your debts over time, with little or no interest. The final method is a traditional debt consolidation loan offered by a bank or credit union.
The Purpose of Debt Consolidation:
No matter which method you choose, there are two main reasons to consolidate debt. The first is to simplify your life with one single payment each month. The second is to reduce the overall cost of managing multiple debts with unfavourable terms. All three methods will accomplish these goals, so knowing which one to choose depends on you understanding your situation and going for the option that makes the most sense in your case.
Consolidating Debt with a Consumer Proposal
A consumer proposal is an agreement between you and your creditors that requires you to pay back only a portion of what was initially owed instead of the full amount. In many cases, the amount you end up paying back can be reduced by up to 70%. This agreed-upon amount can be paid off over time up to a maximum period of five years. If you fulfill your obligations, the majority of the debt will be forgiven. A consumer proposal can consolidate most unsecured debts, including income tax and student loan debt (if you aren’t currently in school and your studies ended more than seven years ago). For a proposal to be accepted it must be approved by creditors representing at least 50% of the overall debt. Once it is accepted the rest of the creditors will also be bound.
What Debts Can Be Consolidated with a Consumer Proposal?
- Credit cards
- Bank loans
- Tax debt
- Payday loans
- Lines of credit
- Student loans (after 7 years)
- Utility bills
- Phone bills
- Furniture loans
What Debts Cannot be Consolidated with a Consumer Proposal?
- Mortgage payments
- Secured vehicle financing
- Other secured debt
Consumer proposals are the only formal debt settlement solutions that reduce what you’re required to pay, other than declaring bankruptcy, regulated by the federal government. As such, they can only be administered by a Licensed Insolvency Trustee. Many of the benefits of a consumer proposal are unique to this method of consolidation, which has made it the preferred insolvency solution in Canada.
- Debt reduction by up to 70%
- You maintain control of your assets
- You don’t pay interest
- Monthly payments are a fixed amount
- Monthly payments are based on what you can afford
- Legal protection from your creditors
- No more collection calls
Is a Consumer Proposal the Right Choice?
If you have more debt than you can repay and you are considering debt consolidation options, a consumer proposal may be the best solution. If this is something you are considering, then we invite you to take the next step and meet with us face-to-face for a free consultation. One of our experienced team members will review your situation and explain all of the options that are available in your specific case. Ultimately, you are the one who will decide which option makes the most sense. You can trust that our team will give you everything you need to make an informed decision.
Consolidating Debt with a Debt Management Plan
Debt management plans are financial programs administered by credit counselling agencies. There are many different companies and organizations offering credit counselling services, including many not-for-profit groups. These plans are typically designed for people who are experiencing hardship but are still able to pay back the full amount of their debts. Debt Management Plans may also be ideal for those who are unable to qualify for a consolidation loan. In addition to helping you get out of debt, they focus on support and counselling to teach healthy spending habits and money management skills.
What debts can be consolidated with a debt management plan?
- Credit cards
- Personal loans
- Other unsecured debts
What debts cannot be consolidated with a debt management plan?
- Income tax
- Student loans
- Most payday loans
- Any creditor who refuses to participate
- Vehicle financing
- Other secured debts
With a debt management plan, you will work with a counsellor who will attempt negotiations with your creditors on your behalf. They will offer your creditors the option to accept a repayment plan that includes the full amount owed to them spread out over an extended period of time. In some cases, they are able to reduce or eliminate interest.
- You can choose to include or exclude certain debts
- You make one monthly payment
- Interest is reduced or eliminated
- Collection calls may stop
A key difference between debt management plans and consumer proposals is that with a management plan, creditors can opt-out for any reason, and many do. If you are considering a DMP here are a few additional points to consider:
- Not all debts can be included
- Creditors can refuse to participate
- Credit counselling agencies charge an administration fee
- You are still responsible for the full amount of debt
Consolidating Debt with a Consolidation Loan
Applying for a consolidation loan means that you are applying to refinance your debt. If you are approved, the bank or credit union will loan you the money to pay off existing debts with more favourable repayment terms than what the current creditors were offering. If your credit cards are continually maxed out or carry a high balance, this option would significantly reduce the amount of interest you will pay. Eliminating several monthly payments will make it easier to manage your finances each month and stay on top of your debt. For those who qualify, it can be a stepping stone that eventually leads away from debt.
- One single monthly payment to service your debt
- Lower interest rates than what you are currently paying
- Extended repayment period to help manage cash-flow
One major issue with this option is the qualification procedure. To get a loan, you have to apply at a bank or financial institution. They will verify that you are currently employed and have a steady income. They may also require you to provide a monthly budget to ensure that you can afford the loan payments each month or may just determine affordability using debt-to-income ratios. If you do not qualify on your own, you may be able to offer up some collateral or have a co-signer guarantee the loan. Even if you do qualify, the interest rates may fluctuate based on your credit score. Here are some points to keep in consideration:
- You may not be eligible
- Collateral or a co-signer may be needed
- You will be responsible for the full amount of debt plus interest
- Your interest rates may be high if you have a low credit score
A final point of consideration is the lack of resources and counselling available. While this option does help simplify your debt situation, it does not provide resources to help you budget and manage future expenses. In fact, you often will still have access to credit and can quickly accumulate additional debts.
The Next Step
We don’t expect to be able to answer every question with a single article. We know that everyone’s situation is different and that you will have questions pertaining to your unique circumstances. If you are evaluating your options, the next step is a free consultation meeting with one of our Licensed Insolvency Trustees. We will look at your debt situation and make sure that you know what options are available to you, and how they would impact you financially. Our goal is to provide you with the information you need to make an informed decision. Get in touch with us today if:
- You don’t know which option makes the most sense for your situation
- You have been denied by the banks for a consolidation loan
- You have more debt than you are able to pay back
- You want to reduce your overall amount of debt and make monthly payments
- You have income tax debt to the CRA that you cannot pay
- You have student loan debt that you cannot pay, and it has been seven years since you completed your studies
- You have any other question