Debt Consolidation

Do you feel that you struggle each month trying to balance your family budget, but the credit card balance never gets paid off or, worse yet, is constantly increasing?  Are you feeling stressed about not being able to pay all your bills on time and in full? Have you been considering ways to consolidate your debt in hopes of lowering your monthly repayment obligation?

When it comes to Debt Consolidation, there are many different options in Canada.  If you are trying to reduce your debt burden or trying to eliminate your debt all together, the best thing to do is to understand your options before you pick which one will work best for you.

Debt consolidation loan

A consolidation loan consists of getting one large loan from an institution, such as a bank or credit union, to pay off all of your smaller debts such credit cards, loans, lines of credit etc. The hope is that once you only have one payment to make each month, the hassle of paying all the individual payments goes away and you can be more consistent with your payments.

Debt Consolidation Loans in Canada can include:

1)  Line of credit which may/may not be secured against your assets such as a house

2)  A conventional second mortgage on your house or other real estate holdings,

3)  Personal loan co-signed/guaranteed by family members or friends.

Advantages of debt consolidation

Some advantages of debt consolidation include:

  1. Debt consolidation loans, hopefully, have a lower interest rate than what you would be carrying on other sources of credit such as department store cards or credit cards.
  2. Only having to worry about one payment per month instead of multiple payments
  3. Greater ability to accelerate payments without penalty if desired.

However, some of the risks or complications associated with a Debt Consolidation Loans include,

1) Difficulties in qualifying for additional debt when you are already overwhelmed by debt

2) General requirement of a cosigner which may mean that you are exposing friends or family to additional or increased financial risk,

3) Ongoing/continuing interest charges and fees

4) Requirement to pledge previously unsecured assets to secure additional sources of debt. This may mean that assets that were once exempt from seizure from your creditors are now subject to seizure if you are unable to pay your new debt in full.

Debt Management Plans – Not Necessarily Debt Consolidation Loan

Debt management plans can come in many forms but some of the most reliable are those that are offered through local not-for-profit societies, such as the Credit Counselling Society of BC. They can negotiate on your behalf to reduce the interest on most types of consumer debt. These debt management plans are

  • Dependent on the cooperation and agreement of your creditors,
  • Work well for smaller amounts of consumer debt (generally less than $10,000)
  • Your income must allow you to pay 100% of the principle and interest off, generally,  in less than 5 years,
  • Cannot include CRA tax debt or student loan debt.

The main downside with these types of Debt Management settlement arrangements is that if not all creditors agree, you once again can be left with multiple levels of interest and multiple payment requirements. These types of arrangements also call for you to pay your debts in full as the face value of the debt is not generally reduced or compromised.

Debt consolidation versus debt settlement? Where is the difference?

There are multiple debt consolidation companies in Canada someone reputable, and some, not so much.  Some firms represent themselves as debt consolidation companies or offer “debt advice”, but what they’re doing is offering debt settlement services for a fee. They present themselves as reputable and some are even members of the Better Business Bureau. But what they’re doing is combining your debt into one payment with their agency.  Others, for a fee, will simply refer you to a Licensed Insolvency Trustee.  They often charge very large upfront fees, somewhere between $1500 and $3000, and are completely unregulated. They have no professional guidelines or governing bodies covering their services. Always be careful when dealing with debt settlement companies or debt consulting agents who are unlicensed and unaccredited

Consolidating debt with a consumer proposal

Increasingly Canadians are seeing the benefit of consolidating their debts by filing a Consumer Proposal. A Consumer Proposal filed directly with a Licensed Insolvency Trustee is a great alternative to bankruptcy and it has the added benefit of being overseen and legislated by the federal government. A Consumer Proposal is powerful tool in that it is binding on all of your creditors, including tax debt and some student loan debt, and it immediately stops the interest.  And the best part is that it does NOT mean that you have to go further into debt!

A consumer proposal will

  1.  Immediately stops the interest
  2.  Binding on all creditors when approved even if some vote against it,
  3.  Creates one affordable monthly payment based on what you can afford
  4.  Reduces or compromises the face amount (principle) of the debt

If going further into debt by getting a consolidation loan would mean more debt that you can’t afford, talk to us today about a Consumer Proposal as this may be the right option for you.

Schedule A No-Obligation Consultation

©2016 - C. E. Craig & Associates Inc.

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