How Does Debt Consolidation Work

In today’s economic climate, it’s not surprising to learn that Canadians are carrying consumer debt at an all-time high. If you find yourself struggling to make it from one debt payment to the next, staying out of the red can start to feel impossible. Many people in this situation automatically assume the only option available to them is bankruptcy. While this is certainly a viable debt solution for people in financial distress, it’s not the only one. Taking the time to evaluate all of the debt solutions available to you will empower you to choose a route that best suits your needs while allowing you to work towards achieving a fresh start. For instance, let’s consider debt consolidation.

Debt consolidation is one of the most frequently used debt management solutions. Utilized by individuals, companies and governments alike, it is a debt management tool used for both minimal and extreme cases of accrued debt. For individuals, the benefit is to pay off one or several debts with a new debt that is easier to manage and often less expensive due to a lower interest rate or more feasible payment conditions. It may also involve giving the consolidating creditor security on an asset.

Here are different types of consolidation examples:

1. Getting a bank loan or line of credit to replace one or many credit cards;
2. Using equity from a house or condo to pay off a car loan that has a higher interest rate;
3. Replacing two bank loans with a line of credit that carries a lower interest rate and the flexibility to borrow an extra amount if needed.

Consider reaching out to your banker or mortgage broker when things are good to see how you can set aside more money for the future, reduce your debt and keep a good credit rating.

When things are not going well, an honest conversation with your financial institution is a good place to start before you start missing payments and heading towards financial distress. If you are not approved for debt consolidation, a Consumer Proposal might be a realistic debt solution for you.

A Licensed Insolvency Trustee at MNP can guide you through the process of making a mutually agreeable offer to your creditors while also providing protection from collections and any legal action against you. A Consumer Proposal would allow you to make a single monthly, or lump sum payment towards your debt, allowing you to achieve financial freedom in five years or less, while protecting your assets and helping you build towards your long-term financial goals.

Contact your local MNP Trustee today for a free, no-obligation consultation.