Debt consolidation is one of the options you may choose to investigate if your debt payments have become overwhelming. Though there are numerous ways to consolidate your debt, the practice generally involves lumping most or all your balances together into a single affordable payment.

Consolidation options are varied and come with their own benefits and potential risks. Let’s consider pros and cons for some of the options available to consolidate debt.

Balance Transfers

Your bank or credit card provider may offer the opportunity to transfer the balance of one or more debts to a credit card or line of credit at a reduced rate over a set timeframe ­— usually between six months and a year.

Qualifying for a balance transfer typically requires a decent credit score and good borrowing history with the lender. It will also typically involve paying an up-front fee, usually in the neighborhood of three percent of the total balance you’re transferring over.

Pros:

• Great introductory rates:  Most balance transfer offers feature an ultra-low or zero percent introductory interest rate.  This maximizes the efficiency of every payment and can help you pay down the debt much faster - provided you don't add to it over that timeframe.
• Maintains your credit:  There's a twofold benefit here:
  • Paying off  your old debts will boost your credit rating.
  • Paying down your balance transfer debt will maintain your positive credit history.

Cons:

• High rates after introductory period:  Once the introductory period ends, any remaining balance will be subject to the normal interest rate (usually around 19.99%).  Before committing to a balance transfer, ensure you know all the rates and terms you are agreeing to for the lifetime of the debt.
• Temptation to spend:  Instantly freeing up space on credit accounts can be dangerous if you don't have a plan to prevent future debt.  Consider reducing your credit limits, cancelling existing accounts or other techniques to prevent overspending.

Consolidation Loan

Generally obtained through a bank or private lender, a consolidation loan ­­enables you to combine most or all of your outstanding debts into one affordable monthly payment. It will ideally have a much lower interest rate than you’re currently paying on average between your credit cards, lines of credit and other loans ­— reducing both the number and total cost of your monthly debt payments.

Pros:

• Simplifies monthly budgeting:  Instead of juggling multiple debt payments every month, you have just one.   This significantly cuts down on your stress and makes it easier to keep track of your finances.
• Increases your cash flow:  A consolidation loan with a favorable interest rate could potentially free up hundreds of dollars in your monthly budget.  You can direct these surplus funds toward paying your debt down even faster or necessities you couldn't afford previously.

Cons:

• Potential for high payments:  To avoid paying more than you are right now, it's critical to ensure your consolidation interest rate is lower than the average of all your outstanding debts.  Don't get so swept away by the promise of making fewer payments that you end up putting yourself in a more difficult financial position.
• Temptation to spend:  If your old credit accounts remain active, you may be tempted to use them.  Consider cancelling or reducing your credit limits to prevent adding new debt and repeating the debt cycle. 

Debt Management Programs

Depending where you live, credit counsellors and other service providers may offer a handful of options which allow you to pay back debt at a reduced amount over a certain timeframe. Usually this involves entering either a Debt Management Plan or otherwise negotiating an informal debt settlement with your creditors.

Pros:

• Pay off debts:  These programs can be effective at reducing both the timeframe and total cost of your debts - provided you have the income to sustain relatively large payments through the duration of the program.
• Good advice and support:  Many credit counsellors can offer insight and feedback about your financial situation and relationship with credit - and help you avoid falling back into the cycle of debt.

Cons:

• High payments:  Some debt management compani9es charge large administrative fees which result in a high monthly payment that can strain your budget.  What may at first seem like an effective solution can quickly become a new financial hardship.
• No legal protection:  Creditors are not required to agree to the terms of your program and may terminate your agreement at any time.  Moreover, creditors may still pursue collection action - including wage garnishments and court judgments for unpaid debts - even while they participate in the debt management program. 

Consumer Proposal or Bankruptcy

Bankruptcies and Consumer Proposals are the only two federally legislated options to ‘consolidate’ your debt. They are also the only two options which, provided you meet your responsibilities, offer both legal protection and a clear path to debt freedom. Most debts may be included in a Bankruptcy or Consumer Proposal and these options tend to be the most cost effective for debtors.  

Pros:

• Legal protection:  Both Consumer Proposals and Bankruptcies place a stay of proceedings on all current and future collection action, wage garnishments and court judgments.  This eliminates the stress of dealing with your creditors and allows you to focus on rebuilding your finances and your life.
• Clear path to debt freedom:   Bankruptcies and consumer proposals give you a transparent, legally binding cost structure, process and timeline to eliminate your debt.  You will never be caught off guard by unexpected administration fees or creditors withdrawing their participation.
• Financial counselling:  Every person who files a Consumer Proposal or Bankruptcy must participate in two financial counselling sessions.  By discussing everything from budgeting strategies to savings goals and understanding the causes of debt — these sessions will give you the confidence to create a stable financial future.   

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Cons:  

• Effect on credit:  Bankruptcies will negatively impact your credit rating for at least six years after their completion.  Consumer Proposals will negatively impact your credit rating for at least three years after their completion.  However, they also offer the opportunity to begin rebuilding your credit almost immediately —certainly sooner and more effectively than if you were to continue the cycle of debt.
• Stigma:  Many people avoid Bankruptcy and Consumer Proposals because of outdated attitudes toward insolvency.  Just remember, these programs exist to give honest, unfortunate debtors like you a second chance and the opportunity for a financial fresh start. 

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The Right Solution

When you’re trapped in the cycle of debt and faced with a range of options, it can be difficult to know which choice is the right one for you and your financial future. Thankfully, you don’t have to make that decision alone. Licensed Insolvency Trustees will always offer a no obligation Free Confidential Consultation to review your financial history, discuss your goals and help you find the best path forward.

Licensed Insolvency Trustees are the only debt professionals in Canada who can administer Life-Changing Debt Solutions such as Consumer Proposals and Bankruptcies. However, they also have a legal and ethical duty to explain all your debt reduction option and provide an unbiased opinion about which options you’d benefit from most. From the moment you walk in their door and through every decision you make, you can feel comfortable knowing you’re getting the best, most informed and most trustworthy advice possible.
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You’re only one call away from defeating your debt for good. Call MNP today to begin your financial fresh start today.

This article was originally written for MNP Ltd.  View the original post here.

By Selina Jacobson, BIA Insolvency Counsellor

Remember Simon and Molly? Last month they completed their first bankruptcy counselling session with Joan. They arrived extremely nervous and not knowing what to expect, but walked away with a greater sense of confidence about how to take control of their financial life.  

Today, they are about to begin their second counselling session. With a better idea of the process, Simon and Molly are looking forward to continuing their journey to a better financial situation and improved relationship with debt.

"What are you going to teach us today?" Molly asks, reaching for a booklet on Joan's desk.

"First, I'd like to review how your budget and money management processes are coming along," Joan replies. "I know you were struggling before our first meeting, so I'm interested to see how you've progressed over the last few weeks."

The couple nod, looking noticeably more confident and self assured than the last time she saw them.

"Then I have some new concepts to work through which I think will really benefit you both," she adds.

"We'll look at some non-budgetary reasons that lead to insolvency. I'll share some helpful resources that can help you stay on track. And, as promised, I'll walk you through how to rebuild your credit once you receive your discharge from bankruptcy."

"Sounds good," Simon replies as he looks over Molly's shoulder at the handout.

Review and Savings Goals

Joan asks Simon and Molly how their budgeting process has progressed over the past month.

Molly explains they've not only set a time each payday to discuss their budget, but also a separate time to complete a monthly report. Simon offers that the guidelines and worksheets were a big help in establishing their routine and that they've already uncovered areas where their budget is leaking and how to fix it.

"Best of all, we didn't argue too much!" Simon laughs.

"Keeping receipts and tracking everything like you suggested was an eye opener," Molly adds.

Pleased with their progress, Joan asks about any challenges they encountered along the way and whether they've set any financial goals. Though they seem eager, both appear hesitant to commit to any financial goals.

"Right now, focusing on sticking to your budget and focusing on open communication is a good goal," Joan explains.

Looking ahead to when the bankruptcy is completed, you could consider some other goals.  Like allocating your current bankruptcy estate payment towards building an emergency fund or saving for something specific you can work towards once the bankruptcy is finished.  

Non-Budgetary Causes of Financial Difficulties

Joan passes a worksheet to Simon and Molly and asks them to read it over. It's a list of common reasons people find themselves in financial distress.

"You'll notice many of these are addictions related," Joan explains. "Gambling, drugs, alcohol, even shopping... I know none of those played a significant role in your bankruptcy. But they underscore how certain personal challenges are more financial in nature than they appear at first glance."

She asks them to identify which items resonate. She's encouraged when Simon and Molly point to many of the same – with inadequate family role models, medical issues and chronic stress rounding out the top three. Joan asks how those factors have affected them and offers suggestions on how they can better prepare for and manage similar situations in the future.

She reinforces the importance of communication. Especially when it comes to stress, which is a broad umbrella which blankets most (if not all) the other factors. She explains how understanding how one another is feeling and coping with challenges can be the key to get past them.

"I've been guilty of holding it in," Simon concedes. "But regularly talking about our finances has shifted my perspective on many of our previous troubles."

Resources to Prevent Future Financial Distress

"I'm glad to see you two are so engaged with this process," Joan says. "Because, unfortunately, multiple bankruptcies are on the rise. And as much as I like you both, I really don't want to see you back here."

She explains that anyone who files for bankruptcy faces two options: One is to continue down the same path – overspending, blaming others for poor financial decision making, not taking accountability and refusing to ask for help. The other is to make the necessary, and often difficult decision to change – to create a budget, curb spending, communicate openly and seek assistance when it's needed.

"If you follow option one," her words hit bluntly, "I can all but guarantee we will meet again."

Simon and Molly's eyes widen. Both are visibly distraught at the prospect of having to repeat this process.

Joan softens her voice and assures them she's confident they're moving in the right direction.

"There will still be bumps along the road," she cautions. "But navigating them is easier when you know when and where to ask for help."

She instructs them to flip to a page in their counselling booklet, which includes contact information for everything from addictions counselling and support to consumer education websites. Joan asks Molly to write down several additional resources that she believes would be particularly helpful given their unique challenges.
"These are your lifelines," she says. "If you ever feel like you're even at risk of drowning, use them!"

Rebuilding Credit

"Remember in the last session, you asked me whether you'd be able to buy a house someday, Molly?" Joan asks. "Or buy a car?"

"It's definitely a long-term goal," Simon replies.

"We realize it will take several years. But we're willing to be patient and do whatever it takes to rebuild our credit, so we can get what we really want – not just 'stuff'," Molly adds.

Joan praises the couple for being realistic. She explains that rebuilding their credit will take time, but also that it's worth thinking about now so they can begin goal setting, planning and putting the pieces in place. She also cautions that not all credit vehicles are equal nor are all credit products suitable for them right now.

Additionally, Joan offers different strategies Simon and Molly may want to consider that will help them build and maintain good credit – including applying for secured credit cards, discussing RRSP loans with their bank and how mortgage brokers can help them rebuild their credit for specific purposes.

Finally, she emphasizes the importance of getting a requesting their credit report immediately after their bankruptcy is discharged and annually moving forward.

"As a consumer, you are the only one who can bring up any issues on your credit report to the credit bureaus," she says.

"They have to follow through and investigate any mistakes. Among other things, like preventing identity theft, correcting any misinformation that may hinder your credit rebuilding goals is vital for protecting your future financial stability."

Nearing the Finish Line

"You will receive your discharge certificate in the mail when you're officially done with your bankruptcy," Joan explains. "Make some copies and keep the original in a safe place – just in case anyone needs to see it."

She smiles and slides a counselling certificate towards Simon and Molly. "I know this isn't the one you're really looking forward to, but trust me when I say it's still an accomplishment worth celebrating and one you've more than earned."

"Thank you so much for everything," Simon says graciously as he reaches out to shake Joan's hand.

"You've been so, so helpful," Molly adds as she reaches out to do the same. "For the first time in a long time we genuinely feel confident about our future."

After walking Simon and Molly to their car, Joan returns to her office to make some final notes and file her copy of the counselling certificate. Confident they took the sessions to heart, she takes a moment to visualize how their post-bankruptcy life might look and feels grateful for the role she got to play. 

This article was originally written for, and published by, MNP.  To view the original post, click here.

By Selina Jacobson, BIA Insolvency Counsellor
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​When an individual or couple files a consumer proposal or an assignment in bankruptcy, the Bankruptcy and Insolvency Act requires the completion of two financial counselling sessions with a Registered Insolvency Counsellor. 

Why Counselling?

Many people are initially skeptical about financial counselling and wonder why they're obliged to participate. They may perceive it as a punishment for taking on too much debt or feel ashamed they need someone else to teach them about money management.

This is absolutely not the case.

As part of the financial rehabilitation of a bankrupt or consumer proposal debtor, financial counselling provides a safe non-judgemental forum to learn new ways to manage finances, recognize what changes are necessary to achieve financial goals and prevent falling back into the same cycle of unmanageable debt.

The financial costs, measured both in dollars and impacts to one's credit report, are significantly higher for second and additional bankruptcies and consumer proposals. Financial counselling is a pre-emptive measure to help avoid these damages.

Inside a Session: Simon and Molly
Simon and Molly are a fictitious couple who recently filed for a joint bankruptcy. Their debt troubles began when Simon lost his job. With only one income stream in the household, the couple began using credit cards and lines of credit to cover many of their living expenses. Their story picks up immediately prior to their first financial counselling session.

Simon and Molly are waiting nervously in the lobby. Neither of them know what to expect. They're both worried, stressed out and have been struggling to get their household budget back on track. When their counselor Joan enters the room, she offers a warm greeting and directs the couple to a meeting room where she provides them with a counselling booklet.

"How are you both today? "Joan begins, smiling.

The couple look at each other and then back at the counsellor. "We're so overwhelmed. And nervous," Molly confesses. "We have no idea what to expect today. We don't even have our budget in place.

"I know we were supposed to fill in a budget form for you, but I lost track of our expenses and work's been all over the place for Simon. So even trying to budget with what little is coming in doesn't make sense." 

Joan's empathetic smile persists. "Don't worry," she replies. "You'll get there. That's what this process is all about. Let's begin with a quick review of your file."

She spends a few minutes thumbing through some paperwork and offers to answer any questions Simon and Molly may have about their bankruptcy. After gaining a better idea of their situation and with the tension in the room noticeably eased, she shifts her focus to the day's materials.

"There are four main topics I would like to discuss with you this afternoon," Joan explains.

"We'll start with money management skills and knowledge. Then we'll look at your shopping and spending habits, identify the warning signs of financial difficulties and I'll give you a brief introduction on how to obtain and use credit moving forward.

"First, let's talk about your budget."

Money Management

Joan returns to the budgeting worksheet that she'd requested Molly and Simon fill out prior to their first meeting. With the couple agreeing to redouble their efforts for the next meeting, Joan offers some tips and techniques to make the process less intimidating. She asks them about methods they have previously used to manage their expenses and offers suggestions for how to create a more structured and sustainable budgeting strategy moving forward.

Joan then turns her focus to effective financial goal setting strategies – explaining how financial goals will strengthen their ability to manage money better, how to set clear and attainable short- and long-term goals and how to use their budget to measure their progress and achieve success. She offers examples of financial goals Simon and Molly may want to consider and hands them several worksheets to complete together before the next meeting.  

Shopping and Spending Habits

Shifting to the next topic, Joan offers Simon and Molly a word of caution.

"While budgeting and money management skills are the foundation for your financial success," she explains, "whether you achieve your goals or not will ultimately depend on how closely your actions align with your plan."

Offering practical examples of how quickly unplanned expenses can add up to completely overshoot a budget, Joan reminds Simon and Molly about the dangers of impulse purchases. To drive the message home, she asks them both to discuss the areas where they have fallen prey to overspending and to consider how they could avoid those urges in the future.

Not wanting it to be all bad news, however, she also reveals some valuable money saving insights she believes the couple might benefit from – including how to reduce their food and household expenses, cut down on monthly bills and even entertainment costs.

Warning Signs of Financial Difficulty

"Money troubles rarely ever happen overnight," Joan warns as she passes Simon and Molly a sheet of paper. It's a list of financial red flags. She asks them to read it over and identify anything they believe may have contributed to their bankruptcy.

As they do, she encourages them to be honest about any poor habits and to consider what they could do to change them. She reminds the couple that changing their behaviours will be an ongoing process and they may have to try several strategies before they find something that works. She encourages them to review the list every month when they create their budget, to use it as a benchmark to review their progress and as a reminder of their priorities whenever they feel the urge to spend outside their plan.

"It's not about beating yourself up," she reminds the couple. "It's about seeing where things could go off the rails and course correcting to prevent things from spiraling out of control."

Obtaining and Using Credit

"It's been a struggle to adjust to only using cash," Simon laments. "Without credit to fall back on, we constantly feel like we're on the verge of collapse."

Thanking him for the transition to the final topic of the afternoon, Joan immediately sympathizes with Simon's point of view. She's watched dozens of clients go through a similar transition and is aware of how difficult it is to lose such a significant financial vehicle – especially so suddenly.

But she's also quick to temper her compassion with a word of warning: "Credit is a financial tool designed for a specific purpose," she says. "And that purpose is never to offset an unbalanced budget."

She then explains some of the more productive and healthy ways the couple could use credit in the future if they choose. She re-assures Simon and Molly that their dreams of someday owning a house or buying a new car are entirely within reach, though it will take some effort to rebuild their credit. She promises they will learn more about that process in the next session.

Looking Ahead  

"Do either of you have any questions before we wrap up for the afternoon?" Joan asks.

"I don't think so," Simon replies.

"You've given us a lot to think about," Molly echoes. "I'm sure we will have several the next time we meet."

"I'm sure you will," Joan says as she looks down at her calendar. "Our next appointment will be one month from today. Does the same time work for you?"

The couple nod in agreement.

"Perfect," she says as she hands them a card with the details for their next meeting. "How are you both feeling now?"

Molly sighs. Both she and Simon look much more relaxed. "Much better, thank you. This was far less stressful than I think either us anticipated."

​Stay tuned for the second installment where we'll continue with Simon, Molly and Joan during their second counselling session. They'll learn contributing factors to insolvency beyond their budget, how to rebuild their credit and helpful resources that can prevent future financial difficulties. 

This article was originally written for, and published by, MNP.  To view the original post, click here.