Becoming Debt Free A Comparison Of Choices

2014-07-08   minute read

Linda Paul

Have you ever wondered who can help if you find yourself overwhelmed with debt? There are many organizations who offer services such as debt consolidation, debt settlement plans, interest reduction and debt forgiveness. There are also other methods of getting a debt problem firmly under control. For your reference, check out a brief comparison of some of these options below. Of course, this information is not a comprehensive summary and is intended only as an introduction to some options that are available. If you are considering using one of these options, you should obtain professional advice before proceeding.

Debt Consolidation Loan
A debt consolidation loan is only available to qualified borrowers. It combines your unsecured debts into one loan – you make a single monthly payment toward paying off that loan. Debt consolidation loans typically spread repayment over a longer period to make monthly payments more manageable. Your interest rate may go up or down, depending on how comfortable the consolidation lender is with your credit rating and ability to repay your debt.

Debt Consolidation Programs & Debt Management Companies
A debt consolidation program essentially combines some or all of your debts into one monthly payment. Like a debt consolidation loan, it spreads your repayment over a longer period to make your monthly payments more manageable. Participation by creditors in a debt consolidation program is voluntary. Some may choose not to participate in the program in which case they will continue to expect payments as per your original agreement and potentially proceed with legal action against you if you default on those payments. A debt consolidation may reduce your interest rate, but it will have a negative impact on your credit rating. These programs are offered by both non-profit (creditor-funded) organizations and for-profit (private) organizations. Be sure to conduct research or obtain advice before choosing a debt consolidator or manager to ensure you are dealing with a reputable firm. It is important that you understand the fees you will be paying and how much of your monthly payments will actually be going to pay back your creditors. You’ll also want to make sure that completion of your payments will legally release you from debts.

Consumer Proposals and Division I Proposals under the Bankruptcy and Insolvency Act
Consumer Proposals and Division I Proposals are legislated forms of debt protection, resulting in fairness for all parties, as well as higher creditor confidence and acceptance. Only a government licensed Trustee can administer a Consumer Proposal or a Division 1 Proposal. The allowable fees in a Consumer Proposal are fixed by law. If your creditors vote to approve your Proposal, your total debt is reduced to an amount you are reasonably able to pay, interest is eliminated and payments are spread over time to allow for a manageable monthly payment. Unsecured creditors cannot opt out of the proposal if it’s approved by creditors holding the required percentage of debt. Secured creditors can only be included in a Proposal under certain circumstances. A Proposal will have a negative impact on your credit rating, however it can be less severe than if you file for bankruptcy.

Filing for bankruptcy is another process that is governed by federal legislation and can only be administered by a licensed Trustee. In most personal bankruptcies, the fees charged in the bankruptcy are set by law. The amount you are expected to pay into a bankruptcy for your creditors is, in part, governed by your level of income. Contrary to popular belief, some assets are protected, meaning that you are entitled to keep them if their value is not above a legally set limit. If the value is above that limit, you can normally still keep that item if you pay into the bankruptcy the amount that is above the allowable limit. If you have a 'secured' debt like a car loan, you can usually choose either to keep the car (or whatever item the loan is secured against) and continue making the payments or you can surrender the car and be released from the loan. A bankruptcy will have a negative impact on your credit rating.

If you are unable to pay your debts, need protection from creditors or want to work toward becoming debt-free, don’t put it off – get advice from a reputable professional. The earlier you speak with a professional debt solutions service provider like MNP Ltd., the more options you may have. 

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