What is Debt Consolidation?
Debt is an overwhelming situation.
It is easy to fall behind in payment when you’ve got too many creditors to manage.
Interest rates can rise dramatically, making it difficult to meet repayment requirements on time.
One of the first options that people consider when they try to manage their debts is debt consolidation.
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Indeed, personal debt consolidation can provide support on many stressful elements, such as:
- Keeping interest rates at a manageable and affordable amount;
- Managing all creditors at the same time.
As such, it’s the ideal finance management structure to handle multiple creditors simultaneously and avoid costly consequences.
If you are unsure how to proceed with consolidating your debt under one payment and whether it is a suitable solution for your money problem, here’s a brief overview of what personal debt consolidation plans are available in Canada.
What does debt consolidation mean?
In principle, personal debt consolidation means that you bring all your personal debts under one single umbrella payment.
This debt management solution is not suitable for companies and other businesses handling corporate debts.
But it is appropriate for small businesses and freelancers with business-related debts that affect their personal assets and finances – because the business isn’t incorporated.
A debt consolidation plan manages all debt repayments by combining them into one monthly payment, to be made until the debts are repaid.
People who choose a personal debt consolidation plan typically don’t benefit from any debt reduction.
They repay the debt in full, using a consolidation loan to do so.
The advantage of a debt consolidation loan is that you can repay the moneylender, the bank or another financial institution, at a lower interest rate than you would be paying on individual and separate debts.
Who is debt consolidation for?
The clue is in the name: A personal debt consolidation plan loan is for individuals who struggle with debt problems.
However, not everyone can apply for a loan.
Bank and financial institutions have made debt consolidation loans especially difficult for debtors.
To qualify for the loan, you will need to have a good credit score, which means that it isn’t suitable for individuals who are already overwhelmed by late payments.
Banks also require a co-signer for the loan who can make payments if you are unable to repay.
Alternatively, some lenders prefer applicants to have a high income for the same reason.
These criteria already eliminate many individuals from a personal debt consolidation loan.
Loan lenders can also want to use an asset as collateral protection, which could be your home or vehicle.
Many individuals don’t want to risk losing an asset.
For others, the financial requirements are so strict that debtors who could benefit from a personal consolidation loan are unable to qualify.
Alternatives to a personal debt consolidation loan
Very few people qualify for a personal debt consolidation loan through a bank.
But, thankfully, it doesn’t mean you’re out of options.
Other debt management programs are available to help you either handle debt problems.
Getting in touch with your creditors
You can negotiate a repayment plan with your creditors to settle your debt.
The repayment plan doesn’t consolidate your debts under a single payment, but it offers options to manage multiple payments and reduce costs.
You can choose to negotiate your debt settlement with your creditors to offer a payment solution that works for you.
Not all creditors are open to negotiating with debtors.
Most will listen to reason if you explain that you intend to pay your debt but are trying to settle the matter with them before letting a trustee administer your money matter.
A licensed insolvency trustee will administer debts in either of two options (see below for more), none of which guarantee high payments to your creditors.
Explaining the situation as honestly as possible and reassuring your creditors about how a payment plan could help you to repay some of your debts can make a difference.
Even if you can’t agree on reducing the amount you owe, you may be able to reduce your interest rate, which makes repayment more manageable.
Credit counselling debt management program
Credit counsellors are non-profit experts who can make arrangements with your creditors.
When you work with a credit counselling company, you can combine your debt under one monthly payment.
While you repay your debts in full, you can benefit from a reduced interest rate.
Your financial situation is assessed by the counsellor to identify the best debt management options for you.
However, not all creditors agree to negotiate with credit counselling companies.
Additionally, some credit counselling companies will require up-front costs to manage your case.
It’s important to mention that the amount you owe does not change, which means that if your income is insufficient, you can’t reduce your debt with this option.
A consumer proposal
A consumer proposal is a unique debt settlement plan that is administered by a licensed insolvency trustee.
The consumer proposal can reduce your debt by up to 80%, allowing you to reduce the amount you pay.
Debts are consolidated into one monthly payment, which makes it easier to regain financial stability.
Because the Canadian government regulates trustees, the consumer proposal can also settle government debts, such as CRA taxes.
Your debts are forgiven by the end of the repayment period, which can be up to 5 years.
Filing personal bankruptcy is often the last option that debtors would like to consider.
However, personal bankruptcy is another debt settlement program that can only be administered by a licensed insolvency trustee.
It is typically for individuals who owe more than they can afford to repay, and who don’t have any asset they can use as collateral.
First-time filing can get you debt-free in approximately 9 months, which is as long as it can take you to repay the cost of bankruptcy: $1,800.
In bankruptcy, all your debts are typically cancelled and forgiven once you’re covered the bankruptcy costs.
This option is the opposite of debt consolidation, as it doesn’t bring debts together but instead cancels all unsecured debts.
But it is a suitable alternative if you can’t get a personal debt consolidation loan.
Consolidating your debt into one payment plan can make it more manageable.
If you’re not sure if you qualify for personal debt consolidation plans, call a trustee to assess your situation.