Many people ask us whether they should get a debt consolidation loan or file for bankruptcy instead.
Although bankruptcy is sometimes the best option, there are many situations when a debt consolidation loan is better than filing bankruptcy in Canada.
If you qualify for a debt consolidation loan and you are confident that you are able to make the repayments, it’s a better option than bankruptcy.
However, if you are unable to make the payments or you don’t qualify in the first place, you should consider bankruptcy.
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What Is A Debt Consolidation Loan?
If you are to understand when a debt consolidation loan is better than filing bankruptcy in Canada, it is important to understand the two options and how they will affect your finances and your credit score.
A debt consolidation loan allows you to take all of your outstanding high interest debts, like credit cards, for example, and bring them all together with one single, low interest loan.
This saves you a lot of money in interest payments and makes the payments more manageable, so you can pay off the debt a lot faster.
The most important question you need to ask is, do I qualify for a debt consolidation loan?
Unfortunately, many people don’t qualify for a consolidation loan because you need a good income and your debts need to be low enough that the bank will be willing to lend you enough to cover them all.
Even if you do qualify, you need to consider whether you can afford the payments or not.
Although you will save some money on interest, the total amount owed remains the same, so many people find that they still cannot afford the payments.
If you are not able to make the monthly payments, getting a debt consolidation loan will not help you.
If you qualify and you can comfortably afford the payments, that is a situation when a debt consolidation loan is better than filing bankruptcy in Canada.
But if you do not qualify or you cannot afford the monthly payments, you need to consider your other options.
What Are The Alternatives To A Debt Consolidation Loan?
If you do not qualify for a debt consolidation loan, you may start thinking about bankruptcy, but there are other options to consider first.
A consumer proposal, for example, allows you to come to an agreement with your creditors so you can repay a portion of the debt.
You will submit a proposal, offering to pay a percentage of the debt, while the rest will be written off. If they agree to the proposal, you will then pay monthly installments until the remaining debt is cleared.
This is often a better option because the total amount that you pay back is lower compared with a debt consolidation loan, so you will be able to clear your debt faster.
Unfortunately, a consumer proposal is dependent on a certain percentage of your creditors accepting the deal that they are offered.
If they do not accept the proposal and a new one cannot be negotiated, you may have to consider bankruptcy instead.
One of the main benefits of a consumer proposal is that you do not have to surrender as many of your assets, and it also has less negative impact on your credit score.
Bankruptcy, on the other hand, is more severe and you will have to surrender a lot of assets.
The monthly payments are not fixed either, and they vary depending on your income.
That’s why it’s best to opt for a consumer proposal, if possible.
When Is A Debt Consolidation Loan Better Than Bankruptcy?
If you qualify for a debt consolidation loan and you can afford to keep up with the monthly payments, it may be your best choice.
However, it’s important to remember that you will still need to pay back the full amount.
If you don’t qualify, you should not immediately declare bankruptcy because you will be forced to surrender a lot of your assets and it is difficult to build up your credit score afterwards.
It is better to opt for a consumer proposal in these situations, if possible.
If you are unsure when a debt consolidation loan is better than filing bankruptcy in Canada, we can advise you based on your specific financial situation.
We will take you through all of your options for debt relief and help you to find the best one for you, so get in touch today.
You can reach us by phone or fill out an evaluation form and we will get back to you.
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