At David Sklar & Associates, many of our clients will express confusion over the term “Debt Consolidation.” This confusion is understandable since the phrase can describe many different debt solutions.
Debt Consolidation combines outstanding, unsecured debts (such as credit cards) into one monthly payment. This payment is less than the total fees owed before consolidation. The three options for Debt Consolidation are Loans, Informal Agreements, and Proposals.
Our licensed insolvency trustees specialize in debt consolidation options, including consumer proposals, and provide credit counselling services to help give you the tools you need to succeed financially. Book a consultation with us, and we will help you weigh your options.
Learn more about the different debt consolidation options available to you. If you need help with debt consolidation, we are happy to go into more depth about your options and help you decide what is best for you.
Secured Debt Consolidation Loans
A Debt Consolidation Loan, also known as debt reconciliation or a Secured Debt Consolidation Loan, is an option for individuals who qualify for a loan. This loan usually comes from a bank, credit union or loan institution. It is most often used to pay down credit cards and outstanding consumer debt and is generally at a lower interest rate than the original debts. Many will take out this loan like a home equity loan.
For some people, secured Debt Consolidation Loans can be an effective way to control their debts and learn how to manage their credit better in the future.
Unfortunately, for others, debt consolidation can result in a spiral into more debt. Instead of cutting up their credit cards and paying off the Consolidation loan, some people continue to overuse their credit and find themselves back in serious debt. Then they get another Consolidation loan, falling deeper into debt.
It is essential to understand that if a Debt Consolidation Loan is in the form of a home equity loan or secured against other assets, you cannot include the loan in a Bankruptcy or a Consumer/Division Proposal. The more severe your debt situation is, the more critical it is to speak with Licensed Debt Professionals before taking out a Secured Debt Consolidation Loan.
Debt Consolidation Information Agreement (Debt Management Plan)
Informal Agreements or Debt Management Plans are a good option for people who earn enough to pay off 100% of their debts but cannot manage to pay off their unsecured debt and unsecured interest.
In this situation, a debtor will work with a credit counsellor to approach their unsecured creditors and suggest an informal agreement where they pay back the balance owing, and ongoing interest charges are reduced (sometimes to 0%). This agreement will not usually include Student Loans and Canada Revenue Agency debt.
People in this type of plan make their monthly payments to the credit counsellor’s company, which then disperses funds to the creditors. For people who qualify for this type of arrangement, this can be an excellent way to pay off as much debt as possible and reduce any damage to their credit ratings.
For those individuals whose salaries or bank accounts have already been garnished or are facing court action over their debts, Informal Agreements cannot force a garnishee removal or stop court proceedings. Nor can they stop the collection efforts of creditors who do not want to be part of the agreement.
People who cannot pay back all of their debt and are insolvent may qualify for a Consumer Proposal or a Division I Proposal.
A Division I Proposal is for small businesses and individuals who owe over $250,000 (does not include the mortgage on a primary residence).
Both proposals are formal, legally binding Debt Consolidation agreements that require services from a Licensed Insolvency Trustee (licensed by the Federal government).
A Proposal is written up based on what an insolvent person can reasonably repay and then submitted by the Trustee to the creditors. If most creditors accept the Proposal, it becomes a legally binding agreement on all of the unsecured creditors. Proposals can result in a substantial reduction in the total amount of outstanding debt.
Once the majority of creditors accepts a Proposal, all unsecured creditors must honour the agreement, debt collection efforts must stop, and the creditor must remove garnishees.
In some situations, a proposal can include Student Loans or Canada Revenue Agency debt. Both of these types of debt are unique and require discussion with a Trustee.
What To Consider Before Opting For a Debt Consolidation Loan
Consumer Proposals VS. Debt Management Programs
At David Sklar & Associates, we’ve seen debt consolidation loans work well for some and not so well for others. It’s essential to keep these factors in mind when weighing your debt consolidation options:
|CONSUMER PROPOSALS||DEBT MANAGEMENT PROGRAMS|
|1. Legally binding agreements between debtors and their eligible unsecured creditors.||1. Not legally binding.|
|2. If a majority of the unsecured creditors approve the proposal, it is then binding on all the unsecured creditors included in the proposal.||2. Unsecured creditors do not have to agree to be part of the program, even if the majority have accepted the program.|
|3. Can significantly reduce the total amounts repaid by the debtor.||3.The amount payable will depend on how many creditors agree to the program and how many also agree to stop or reduce interest charges.|
|4. Stops interest charges on unsecured debt.||4. No authority to force interest reductions or eliminations.|
|5. Stops unsecured creditor collection efforts.||5. No authority to stop unsecured creditor collection efforts.|
|6. Stops unsecured creditor legal actions – including garnishees and court cases.||6. No authority to stop unsecured creditor legal actions. Cannot stop garnishees or court cases.|
|7. Has flexible payment options but is most often set up as manageable monthly payments.||7. Payments are usually monthly and will most likely be substantially higher than the debtor would have paid in a consumer proposal.|
|8. Cannot be longer than 5 years.||8. Can be longer than 5 years.|
|9. Can include most Canada Revenue tax debts.||9. Do not normally include Canada Revenue tax debts.|
|10. Requires applicants to be insolvent – that is, debtors who do not have the resources to repay their unsecured debts in a reasonable time period.||10. Do not require applicants to be insolvent.|
11. Can only be filed and administered by a Licensed Insolvency Trustee, such as David Sklar & Associates.
|11. Are normally filed by not-for-profit credit counselling agencies.|
Credit Card Habits
Debt consolidation loans will not help you if your habits don’t change. Insolvency can be an opportunity to learn how to use credit responsibly and budget your life within your means. If you’re struggling every month to pay all of your credit cards, you would be reluctant to make any purchases with them.
Take that credit card debt away with a debt consolidation loan, and it’s easy to fall into temptation – only you still have a debt consolidation loan to pay back. If you are going to opt for this loan, you need to be prepared to maintain better financial habits to pay back your loan and set yourself up for future financial success.
We know this can be a struggle, but you can target the root of your spending problems by engaging in credit counselling with David Sklar & Associates. We will review your habits and give you the tools and strategies you need to prevent yourself from getting deep into debt again.
Bad Credit Means Higher Interest
If you’ve ever gone to collection or missed payments, your chances of getting a loan from your bank or credit union are low. That leaves predatory lenders with high-interest loans who can charge over 30% interest, sometimes even higher than the rates you paid on other debts. Look carefully at the rates on all of your debts before rolling them into a debt consolidation loan.
Putting Up Collateral
You might still be able to get a bank or credit union loan if you put up collateral, such as equity in your house. If you were to lose your job or find yourself unable to make payments, you could lose your home. It’s often a better idea to leave unsecured debt unsecured, so you don’t put your assets at risk.
Learn Your Debt Consolidation Options With David Sklar & Associates
Identifying the options for debt consolidation that best suits your needs can be a challenge. After all, there is no one-size-fits-all option for debt relief. If you’re facing insolvency and tempted by the easy way out of a debt consolidation loan, learn about the Consumer Proposal process first.
A Consumer Proposal reduces the total debt you have to pay while putting a stop to interest payments. It’s similar to bankruptcy, but it doesn’t involve giving up your assets. Instead, you agree to a set payment plan over a period, which often consists of paying back less money.
You have to be insolvent to be eligible for a Consumer Proposal in Ontario, so if you’re still able to pay back your debts, credit counselling may be a better solution. If a debt consolidation loan seems like it makes sense, you may just need to be setting aside more money for your credit cards.
If you live in the Greater Toronto Area and need help with debt consolidation, take advantage of a free, no-obligation consultation with the Licensed Debt Professionals™ at David Sklar and Associates. We will review your current financial situation and explore all of your debt-removal options with you, even those that do not involve our services.