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 lana.gilbertson@mnp.ca.

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 lana.gilbertson@mnp.ca or 604-637-1599.

Consumer Proposals are one of the leading alternatives to bankruptcy in Canada today.  To put that into a local context - in 2015, over 55% of all consumer insolvencies filed in Greater Vancouver were Consumer Proposals.  The numbers were only slightly lower on Vancouver Island at 44%.  For all of British Columbia it was 51%.

A Consumer Proposal is a formal process governed by regulations contained in the Bankruptcy & Insolvency Act, and a Consumer Proposal must be filed through a Licensed Insolvency Trustee.  A Debt Management Plan, on the other hand, is an informal arrangement with creditors on terms negotiated by a credit counsellor. 

There are some important differences between the two processes, but there are also a few similarities:

1. Both Consumer Proposals and Debt Management Plans have the express purpose of providing you with more favourable repayment terms with your creditors so you can eventually become debt free.
2. Both involve some amount of negotiation with your creditors.  This is always true in a Debt Management Plan, but only necessary in a Consumer Proposal if the creditors don't accept your initial offer.
3. Both will negatively impact your credit rating in virtually the same way.  Canada's major credit reporting agencies - Equifax and TransUnion Canada - will report details of the Consumer Proposal or Debt Management Plan.  The creditors will report your accounts as R7 or I7.  This information will be removed from your credit report three (3) years after completion of your Consumer Proposal or Debt Management Plan.

These are the differences between a Consumer Proposal and Debt Management Plan:

1.  In the vast majority of cases, a Consumer Proposal involves a reduction in the total indebtedness.  By contrast, you must pay your total debt under a Debt Management Plan.
2. Interest does not accrue in a Consumer Proposal.  Under a Debt Management Plan, interest will continue to accrue, but often at a reduced rate as negotiated by the credit counsellor.
3. You can deal with government debts such as income taxes and student loans in a Consumer Proposal.  By contrast, a credit counsellor will not be able to negotiate with the government and therefore these debts cannot be included in a Debt Management Plan.
4. There are clear and consistent rules governing the Consumer Proposal which are transparent to all stakeholders.  Under a Consumer Proposal, all creditors are dealt with at the same time and on the same terms.  Moreover, what constitutes a default under the Consumer Proposal is codified.  By contrast, Debt Management is an informal process with no rules and regulations.  Different creditors may agree to different terms, and they may leave the plan at any time if you miss even one payment.
5. A Consumer Proposal is appropriate when you can't repay your debts in full or in the ordinary course.  A Debt Management Plan is appropriate when you can pay your debts in full but need more favourable repayment terms and help repaying your debt. 

If you are having trouble repaying your debt and would like to know more about Consumer Proposals, Debt Management Plans and other options, speak with a Licensed Insolvency Trustee who will review your situation in detail and explain all of your options.