What Is The Best Debt Consolidation Option?

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

A 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 Trustee in Bankruptcy 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 provincialcounterparts, whereas most debt management plans do not.

Only a licensed Trustee can file 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.

To learn more about a consumer proposal, read one of our previous blog posts, What is a Consumer Proposal and can it solve my debt problem?