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What is Debt Consolidation?

Debt consolidation is reorganizing your debts to a plan that provides for one simple payment. The purpose is to simplify your finances by managing only one payment (instead of several payments) and reduce the interest costs of the debt, if you can get a lower interest rate.

What are my debt consolidation options?

Debt Consolidation can occur in several ways:

Consolidate Debt with a Consumer Proposal

With the assistance of a Licensed Insolvency Trustee like A. Farber & Partners Inc., you can offer your creditors one monthly payment in settlement of your debt, ranging from 30% to 100% of your total debt.

The advantages of consolidating debt through a consumer proposal are:

What is debt consolidation?

  • A consumer proposal commonly reduces the total amount of the debt by as much as 70%
  • It eliminates interest costs
  • It consolidates debt into one simple monthly payment
  • Your home is not given as collateral
  • It is effective with income tax and HST debt
  • A consumer proposal immediately stops garnishment and any future legal action
  • Decreases the need for credit, due to lower debt payments
  • Allows you to get out of debt quicker than through other debt consolidation methods while avoiding bankruptcy

 

The disadvantage of consolidating debt through a consumer proposal is:

A consumer proposal negatively impacts the credit rating for a period of 3 years after the consumer proposal is complete. However, the consumer proposal is not impactful if the credit rating is already damaged (e.g. by missing payments or having a high debt/credit ratio). 


Consolidate debt with an Unsecured (No-collateral) Bank Loan

Banks offer loans to pay off your existing high-interest debt (credit cards and others). In return, you repay their loan (which should have a lower interest rate). A precondition for this would be a good credit record with a history of paying your bills on time.

The advantages of consolidating debt with a bank loan:

  • A low-interest bank loan can reduce the interest cost of high-interest debt
  • Payments are consolidated in one simple monthly payment
  • If you have a good credit rating, this is preserved
  • Your home is not given as collateral

 

Disadvantages of consolidating debt with a bank loan:

  • If your credit is bruised, it may be difficult to obtain a bank loan without providing collateral for the loan. The bank will want to see a high credit rating and/or great ability to repay the loan (good income). If you have a legal action or garnishment started, you are not likely going to qualify for the loan due to the action’s impact on your credit rating
  • Banks are likely to only consolidate debts at the same bank which may leave you to deal with other debts at other banks and institutions
  • Payment may not be affordable as the repayment term may only 3 years long, resulting in a high monthly payment term on the new bank loan
  • There is still interest being charged on the new loan
  • You have to pay the full amount of the debt back to your creditors

Consolidating Debt Through Mortgage Refinancing

If you have sufficient equity (the difference between your home’s appraised value and your current mortgage balance) in your home, there are lenders who offer loans to pay off your existing high-interest debt (credit cards and others). In return, you repay their loan which should have a lower interest rate.

The advantages of consolidating debt through mortgage refinancing:

  • Reduce interest cost of high-interest debt
  • One simple payment
  • Repaid over a long period of time, which keeps the monthly payments down (but not the overall debt)

 

The advantages of consolidating debt through mortgage refinancing:

  • You are providing your home as collateral for the second mortgage. If you default on payments the home is a risk of a power of sale
  • Loan must be repaid in full upon the sale of the home
  • You need sufficient equity in the home.  If you have a small amount of equity, you may not qualify for the loan or you may pay a greater interest rate
  • There are commonly lender fees added to the mortgage
  • There is still interest being charged on the new loan
  • You are paying the full amount of the debt back to your creditors
  • If you have some legal action or garnishment started against you, it would cease if paid off on the mortgage refinancing.  However, you are likely going to pay a higher interest rate on the mortgage due to the impact of the legal action on your credit rating.

 

Are you considering debt consolidation? Do you want to know how it impacts your financial situation? And figure out what is the best solution for you to get out of debt? If so, please book one of our free Debt Relief Consultations. One of our debt relief experts will sit down with you, review your debt and finances, and inform you of the best way for you to become debt free. There is no obligation and your privacy is guaranteed. Please call us toll-free at 1 (844) 507-7526, or fill out this form.