One size does not fit all
Why Read This Guide?
This guide is meant for those who are struggling with debt and who have determined that budgeting alone is not enough. It’s for those who know they need to do something to bring their debt payments under control, but just don’t know which options are safe or who they should talk to.
Our guide aims to provide you with the tools that you need to succeed. It’s not meant to replace the advice of a professional, but it is meant to give you some resources that will help you ask the right questions along the way.
We’ll tell you up front that this guide is long, but it is broken down into eight easy to read chapters, all available free and online. You can read the chapter summaries below, follow the links on the right or, if you prefer, download the entire guide in PDF Ebook here.
Introduction to Debt Consolidation
Debt consolidation is a way of managing debt by combining one or more outstanding debt obligations into one.
There are many reasons to consolidate your debt:
- You save money by reducing your interest costs and possibly principal repayments.
- Managing your money becomes easier with one single monthly payment.
- You can get out of debt sooner.
With the right debt consolidation program your life becomes less stressful. The problem is there are almost as many ways to consolidate your debts in Canada as there are different types of credit. Gone are the days when debt consolidation simply meant talking to your banker about getting a new loan or a second mortgage and using the money to pay off your credit card debt. Today you have to decide if you need more than just a new loan. Do you also need some form of debt relief? Which options are safe and how will each choice affect your credit rating?
Today debt consolidation is offered by many different providers including traditional financial institutions; finance companies and specialty lenders; not-for-profit and for-profit credit counselling agencies; as well as bankruptcy trustees. Deciding who to talk to can be a daunting task.
A good starting point is to understand the pros and cons of each debt consolidation approach and how it can help you.
In this guide we will explain:
- How debt consolidation works in Canada.
- What you should look for in a debt consolidation program.
- The difference between debt consolidation and debt settlement.
- How a debt management plan or consumer proposal can consolidate your debts and provide debt relief at the same time.
We will “run the numbers” for each debt consolidation option through a simple case study to show you how each solution can benefit your finances.
Once you understand how these alternatives differ you will be in a better position to choose the right option for your situation. After all, no one person’s financial problems are the same, and no one program will work for everyone.
Chapter 1: Five Goals For Restructuring Debt
When you are struggling with debt payments you need a solution, and often a quick one. To be successful however you need to not only consolidate your payments but make sure that your underlying debt problems are being addressed. This includes making sure you can pay your debts off in a reasonable amount of time and dealing with any legal issues that may be happening like a wage garnishment or calls from collection agencies.
In chapter one of our guide we outline five core debt consolidation goals that you should consider to measure whether or not any debt consolidation program will meet your needs. You may be tempted to skip this chapter but we strongly recommend you review these goals, as these are how you will measure the effectiveness of any one program against another.
Chapter 2: Understanding Different Debt Consolidation Services
The increase in the number of Canadians needing debt help has resulted in a corresponding growth in the number and types of options available to Canadians looking for debt relief. Some programs are good, others not so much. Most are good at the right time, but some should be avoided all together.
Chapter two provides a brief description of the different programs and providers out there, as well as warnings about some less than scrupulous offerings. We will briefly explain the different options including:
- debt consolidation loan;
- debt management plan;
- consumer proposal; and
- debt settlement.
Chapter 3: Debt Consolidation Loans
When most people think of debt consolidation they think about taking out a loan from their bank, credit union or other financial institution. This is the most traditional form of debt consolidation. Even so, there is a lot to consider.
In Chapter 3 we look at different factors that will affect the cost of your debt consolidation loan, including whether or not you should consider a secured loan like a home equity loan. We describe what your lender will be looking for when reviewing your qualification for a debt consolidation loan.
We will also visit, John. In our first case study, we look at the financial impact of consolidating several credit card debts into one traditional debt consolidation loan.
Finally we will visit the question, ‘should you take out a debt consolidation loan’ by looking at the pros and cons as well as revisiting our five consolidation goals.
Chapter 4: Debt Management Plans
Credit counselling agencies offer a debt consolidation program known as a debt management plan. This is not a new loan, but a way to contact some of your creditors to arrange for repayment of your debt with the help of a not-for-profit credit counsellor.
In Chapter 4 we explain how a debt management plan works, what debts can and cannot be included and look at when it is a good option to choose a debt management program.
In our case study, we look at how Jasmine can consolidate her credit card debts and save interest by filing a debt management plan.
Chapter 5: Consumer Proposals
It is possible to safely consolidate and settle your debt through a consumer proposal filed with a licensed insolvency trustee. A consumer proposal is a formal debt settlement option available in Canada under the Bankruptcy and Insolvency Act and filed with a Licensed Insolvency Trustee.
In Chapter 5 we look at how a consumer proposal works and why it’s not the right choice for everyone. We summarize the advantages and disadvantages of a consumer proposal and explain who will most likely benefit from choosing this approach.
In our case study we look at how Steve can best accomplish his debt consolidation objectives by filing a consumer proposal.
Chapter 6: The Final Comparison
In Chapter 6 we bring all of our scenarios together to compare the impact on our five debt consolidation goals. We look at how a debt consolidation loan, debt management plan and consumer proposal stack up against each other in terms of these objectives.
Chapter 7: Debt Consolidation When You Have Bad Credit
Debt consolidation decisions involve choosing the right lender, negotiating a good rate and choosing the best loan term. However, when you have poor credit things become a little more complicated. When looking at more formal debt relief options, most people are very concerned about the impact that a debt management plan or consumer proposal will have on their credit rating.
In Chapter 7 we look at the difference between credit score and credit capacity and explain why you may want to opt for a debt relief alternative, rather than risking a high cost debt consolidation loan.
Chapter 8: Finding A Debt Consolidation Provider
Finally, we wrap up our debt consolidation guide with some tips and warnings about how to choose the right lender, credit counsellor or licensed insolvency trustee. We provide a list of questions you should ask along the way and highlight some red flags that should serve as a warning sign that you may want to look elsewhere.