Eliminate Credit Card & Unsecured Debts
Debt consolidation allows you to combine all of your unsecured debts into one easy monthly payment. You can:
- reduce your monthly payments
- pay bills in just one simple payment
- save interest, fees and penalties (the amount depends on the program you choose)
- get out of debt faster.
If you have been researching debt consolidation or debt consolidation loans in the Greater Toronto Area you may have questions about what consolidation program or service is best.
There are three main ways you can consolidate your debts – borrow money through a Debt Consolidation Loan, negotiate a repayment plan through a Debt Management Plan or settle your debts through a Consumer Proposal to your creditors.
Debt Consolidation Loans
Who is eligible? If you have reasonably good credit you may be able to borrow money from a bank, finance company or private lender. You use the proceeds from this loan to repay your other debts, and then make one monthly payment to your new lender.
When it works. A debt consolidation loan is a good option if you have a small amount of unsecured debt and you can obtain a new loan at a much lower interest rate than you are paying today. By reducing your interest costs, your monthly payment is reduced and you can pay off your debts sooner.
Things to consider: Debt consolidation loans are not for everyone. Some factors to consider:
- if you have poor credit or have missed loan payments in the past, you may not qualify
- depending on who grants the loan, your interest rate may be too high
- you may need to have a co-signer or use collateral (such as a home equity loan)
- if you miss payments you risk losing your home or can put your co-signer at risk
- depending on your provider, you can end up paying high up-front fees.
Debt Management Plan
Who is eligible? You must be able repay all of your debts in full, although you may need more time and perhaps relief from interest and penalties. A Debt Management Program is a service offered through not-for-profit credit counselling agencies. They will try to negotiate with your creditors a repayment plan that you can afford based on your monthly budget. The agreement usually includes a reduction, or even total forgiveness of, interest and penalties but only if you successfully complete the program.
When it works. A Debt Management Plan works best if you have only a small amount of credit card debt that you can afford to pay off, but you can’t repay the high interest rates charged. Not all creditors will negotiate with your credit counsellor, so not all debts can be included.
Things to consider: Anyone can claim to be a credit counsellor and offer to settle your debts with your creditors. No license is required, and the program is not part of the federally legislated Bankruptcy and Insolvency Act. Some things you should know:
- A DMP or informal debt settlement is NOT legally binding. Any creditor can opt out of the plan.
- Your wages can still be garnished and collection calls can, and probably will continue.
- Not all creditors will negotiate with your credit counsellor. You should never make any payments until you are sure you have a written agreement in place.
- If you are unable to complete the plan, everything goes back to the beginning. All of your debts are back, plus new penalties and interest.
Who is eligible? If you owe less than $250,000 in unsecured debt (not including your mortgage or secured car loan) and you cannot afford to repay your debts as they come due you qualify for a Consumer Proposal. If you owe more than $250,000 you qualify for what is called a Division I Proposal. Both allow you to settle your debts through a legal process administered by a Bankruptcy Trustee under the Bankruptcy and Insolvency Act.
When it works. All unsecured debts are included in a consumer proposal. If you owe money on your credit cards, have payday loans, tax debts, even outstanding phone or utility accounts, these are included. You can even cancel contracts like expensive car leases you would like to get out of.
Things to consider: A consumer proposal, if accepted, will:
- stop all legal action including collections and wage garnishments
- allow you to keep assets such as your home or car (as long as you can maintain the monthly payments)
- deal with all of your unsecured creditors, no-one can ‘opt out’
- reduce what you have to repay, often to as low as 25% although it depends on what you can afford
- allow you the protection only a Trustee in Bankruptcy can provide but allow your to AVOID bankruptcy.
If you would like to learn more about consumer proposals, read our article about consumer proposals and how the process works.
Find Out What Option Is Best For You
As federally Licensed Insolvency Trsutees, we are required by law to help you explore all of your debt relief alternatives. To find out if a bankruptcy, consumer proposal, debt management plan or debt consolidation loan is your best option, talk to our Toronto debt experts. Call the Bankruptcy Toronto and Consumer Proposal team at 310-PLAN for more information and to set up a free consultation. You can also contact us through our online evaluation form and ask any questions you might have about debt consolidation. The best way to deal with your debt problems is to have a plan – let’s make one together.