Debt consolidation is the process of combining two or more debts into one. The aim of debt consolidation is to enable you to become debt-free through one consolidated monthly payment over a defined period of time. Debt consolidation can seem like an attractive option when you are struggling to make payments to several creditors or when your overall indebtedness never seems to decrease, despite making minimum payments.
There are several debt consolidation options, each with their own benefits and considerations. The best debt consolidation option depends on your financial situation and other factors.
1. Personal loans and personal lines of credit
When your debt is causing you financial pressures, it is natural to first consider consolidating your debt through a personal loan or a personal line of credit provided by a bank or finance company.
We can define personal loan as a lump sum loan disbursement to make a one-time purchase (such as a car) or commonly, to consolidate debt. As you repay the personal loan, the loan balance decreases and the loan is not reusable.
A personal line of credit, by contrast, is reusable. Once you are approved for a personal line of credit, you can access any portion of the credit line at any time.
Beware of the cost of borrowing, as personal loans and personal lines of credit carry interest charges. A personal loan can have a fixed or variable rate, while a personal line of credit has a variable rate. The amount you can borrow will depend on your credit score, your ability to service the debt and other factors.
If you are turned down for a personal loan or personal line of credit, there are other ways to achieve debt consolidation, outlined below.
2. Debt management program
An accredited, non-profit credit counselling agency can assist you with a debt management program. A debt management program consolidates all of your debt payments into one monthly payment that you can afford. You then make the one monthly payment to the credit counselling agency and they distribute the funds to the various creditors.
If you work with a reputable credit counselling agency, your interest rates will typically be reduced to either zero or a very low interest rate. To cover their costs, non-profit credit counselling agencies charge small fees for their debt management programs. You should never pay large, upfront fees for a debt management plan, nor should you ever have to pay for advice about your options. If you are asked to pay fees for advice or charged large upfront fees to go on any debt management program, you are not dealing with a reputable organization.
Your creditors have to agree to allow you to go on a debt management program, but they typically will if a reputable credit counselling agency believes that a debt management program is right for you. If a reputable credit counselling agency believes your overall debt level is too high to repay in a reasonable period of time under a debt management program, they will suggest that you contact a Licensed Insolvency Trustee for advice about a consumer proposal - a legal process for settling credit card debt, among other debts.
3. Consumer Proposal
A consumer proposal is a formal, government-regulated option that involves the consolidation of all unsecured debt into a single monthly payment. The debts do not continue to accumulate interest and there is a stay of proceeding that stops garnishments (excluding child support), harassing calls and other collection actions.
Most consumer proposals involve a settlement arrangement whereby creditors are prepared to accept repayment terms of less than what you owe, as long it exceeds what would be available if you were to file for personal bankruptcy. A consumer proposal cannot exceed 60 months or 5 years and generally involves a monthly payment, but is flexible enough to allow for lump sum payments, semi-annual payments or some other unique payment schedule that works for your situation.
In addition, consumer proposals can include debts to Canada Revenue Agency and their provincial counterparts, whereas most debt management plans do not.
Only a Licensed Insolvency Trustee can file and administer a consumer proposal on your behalf. For many people, a consumer proposal is a desirable alternative to bankruptcy as it enables you to retain your assets, involves fewer duties / responsibilities than bankruptcy and generally does not affect your credit rating as significantly as bankruptcy.
Click here to learn more about consumer proposals.
Lana Gilbertson is a Licensed Insolvency Trustee with MNP Ltd., based in Vancouver, BC for more about how Lana can help, contact her directly at 604-637-1599 or firstname.lastname@example.org.
Confronting your debt can be overwhelming. Perhaps you’ve stopped borrowing, but mounting interest means you still owe more and more each month. Maybe you’re keeping up with minimum payments and have avoided any nasty collections calls. But that’s only stopped things from getting worse. You want to reset your budget and get out of debt for good – but you may not know where to start. Listed below are five ways to get your finances back on track and under control.
1. Regular Monthly Payments
With some credit cards, payday loans and other high interest debts, it can take anywhere from 20 to 75 years to eliminate the balance completely making only the minimum payment each month. If you’re going to make a meaningful impact, you’ll need to make regular monthly payments against the principal value wherever possible. To figure out what you can afford and what you will need to contribute, use the following method:
To figure out what you can afford:
To figure out what you will need to contribute:
In the above example, you would need to contribute $403 per month between both of your credit cards to come close to your goal of paying both off within 36 months. With $550 in disposable income, that would leave you with $147 per month left over for saving or other miscellaneous spending, such as entertainment or dining out. Though interest will still accumulate and you will not be completely debt free at the end of three years, you will be very close and much closer than had you not set up these regular monthly payments.
In the event your required contribution is more than you can afford, adjust the number of months to pay off your debts until you reach a monthly amount that works for your budget. If the contribution amount is at or less than your minimum payments, you may want to proceed directly to the Bankruptcy and Consumer Proposal section of this article.
2. Consolidation Loan
If you qualify for a bank loan sufficient to pay your existing balances in full, a consolidation loan can often be the least costly and most efficient path to becoming debt-free. This is especially true if the bulk of your debt is on high interest devices such as credit cards or payday loans. Instead of worrying about multiple creditors each month, you would only be required to make one payment and could see anywhere from a 50% to 75% reduction in interest costs.
If you do opt for a consolidation loan, however, it is important it be through a bank or credit union. Other lenders may charge you interest rates comparable to – or even higher than – what you are already paying, which will do little to help you get out of debt faster and could even make your situation worse.
3. Increase Your Income
Provided you have the time, energy and existing resources, taking on part-time employment or some form of income generating activity can accelerate your debt repayment goals. Several companies such as Uber and Skip the Dishes allow drivers to set their own hours, allowing you to work as much or as little as you want. Online classifieds such as Craigslist of Kijiji often have help-wanted ads for odd-jobs you may be qualified for. Online marketplaces such as Amazon, E-Bay and Etsy are great places to sell handmade crafts, gently used items you no longer need. Traditional part-time employment opportunities, such as the retail or restaurant industries, may also work for you.
If you do opt to take this route, remember the added costs it will take to get started – including childcare, fuel, tools and other supplies. The promise of added income can be lucrative, but you want to ensure your efforts produce a sufficient benefit. Otherwise, the outcome may not be worth your investment.
4. Liquidating Assets
If you have assets which can easily be sold or liquidated to pay off your debts, this may be a quick and effective solution to significantly reduce your personal debt load. Everything from an old car which is rarely used, to gold or silver jewelry you are willing to part with, GICs that have reached maturity, real estate and other investments you own are potential opportunities for generating cashflow.
With that said – you will want to seek professional advice before liquidating any investments or registered savings plans to ensure the potential tax costs do not outweigh the debt reduction benefits. Withdrawing from your RRSPs, for example, will reduce your future contribution room and may trigger a tax debt you’ll be required to pay in the future.
5. Bankruptcy or Consumer Proposal
For many people, a bankruptcy or consumer proposal is a last resort and one they would rather avoid. However, for those who qualify, it can often be the Life Changing Debt Solution they need – as well as their best and fastest route to a financial fresh start.
Though they differ in process and requirements of the debtor, both bankruptcies and consumer proposals are formal repayment plans which are governed by federal legislation and executed by a Licensed Insolvency Trustee. Each allows creditors to receive full or partial repayment of the funds they are owed while offering honest consumers a clear path to freedom from debt. As long as the debtor fulfills all the requirements they and their creditors have agreed to, they will be able to start over with a clean slate once the term of their bankruptcy or consumer proposal is complete.
If you’re considering a bankruptcy or consumer proposal or are interested in learning how an MNP Licensed Insolvency can help you on your journey to becoming debt-free, call us for a free confidential consultation to learn about your options and which one might be best for you.
Based out of Abbotsford, Linda Paul is a Licensed Insolvency Trustee and Senior Vice President at MNP LTD. To learn more about how Linda can help, contact her directly at 604-870-7445 or email@example.com.
A Consumer Proposal is one of many options available to consumers who are looking for a manageable way to eliminate debt while avoiding bankruptcy. It is very important for consumers to carefully consider all options before choosing a debt repayment strategy, as different strategies have their own pros and cons.
A Consumer Proposal is a formal, legally binding process which involves a reduction of unsecured debt, or an extension of time for repayment of the debt, or both. The term of a Consumer Proposal must not exceed five (5) years, and no interest accumulates during the term of the Consumer Proposal. A Consumer Proposal is legally binding on all types of unsecured creditors (including government debts such as unpaid taxes and student loans) provided that the Consumer Proposal is accepted by creditors holding the majority in dollar value of proven claims. A Consumer Proposal is administered by a Licensed Insolvency Trustee.
Orderly Payment of Debts (“OPD”) is a debt repayment arrangement available only in the provinces of Alberta, Saskatchewan and Nova Scotia. OPD begins with an application to the Court for an Order consolidating unsecured debts into one monthly payment, with an interest rate of 5% and a payment period of up to 3 years. OPD is legally binding on many types of unsecured creditors, providing that they have consented to be included in the arrangement when they are owed more than $1,000.00. Certain types of debts such as income taxes or business debts are not included, however. OPD is administered by provincial credit counsellors.
A Debt Management Plan (“DMP”) is an informal (i.e., not legally binding) debt repayment plan which is arranged through a licensed, accredited, non-profit credit counselling organization. A credit counsellor works with the debtor and creditors to develop a more manageable and affordable debt repayment plan. Under DMP, credit card and similar unsecured debt payments are consolidated into one affordable payment which is made to the credit counselling service, who then distributes the payment to the creditors. Licensed, accredited, non-profit credit counsellors are effective in negotiating with creditors to reduce or eliminate interest, which helps reduce overall costs. Many types of debts, such as unpaid income taxes, student loans and other government debts cannot be part of DMP.
A Consolidation Loan is a loan provided by a bank, credit union or finance company to pay out other debts and consolidate several monthly payments into one monthly payment. A consolidation loan requires an application and approval by the lender, who will consider the debtor’s credit rating, income, assets and debts. Many lenders require the debtor to provide security or collateral for a consolidation loan. Interest rates on consolidation loans can be high and will vary from lender to lender.
Deciding which strategy will work best can be difficult without professional advice, because the right strategy will depend on the debtor’s income and expenses, assets and liabilities, family situation and other factors. A Licensed Insolvency Trustee is qualified to provide assessment and advice about the various debt repayment strategies, including the merits, consequences and costs of the various options. A meeting with a Licensed Insolvency Trustee is free, confidential and unbiased, so consider speaking with one if you are looking for your own best debt repayment strategy.
The table below has been designed to compare Consumer Proposals with other bankruptcy alternatives such as DMP, OPD and consolidation loans.
This is the fourth of five blogs I wrote for MNP Debt's Series on Consumer Proposals. The first, second and third posts in the series can be found here.
Lana Gilbertson is a Licensed Insolvency Trustee serving Greater Vancouver and Vancouver Island. To learn more about how Lana can help, contact her at firstname.lastname@example.org or 604-637-1599.