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Debt Consolidation in Canada

Debt consolidation

If you’re dealing with a large amount of debt, you might consider debt consolidation to simplify the repayment process and save money. A Licensed Insolvency Trustee (LIT) can assess your finances to understand if you are a good candidate for debt consolidation or if another strategy is a better fit. 

What is Debt Consolidation?

Debt consolidation is a financial process that involves combining multiple debts into one monthly payment. The purpose of debt consolidation is to help simplify the debt repayment process. Rather than juggling multiple creditors, payment deadlines, and interest rates, you can roll all of your debt into one easy-to-manage payment.  

Why Consolidate Your Debt?

Debt consolidation can also help you get out of debt faster if you find a consolidation loan that:

  • Has a lower interest rate than your current debts
  • Has a lower monthly payment than all of your other debts put together

For debt consolidation to be successful, you also have to avoid taking on more debt while you pay back your consolidation loan.

How to Consolidate Debt

There are several methods you can use to consolidate debt. The one that works best for you will depend on factors including your credit score, current debt terms, and overall financial situation. 

Consolidation loan 

A consolidation loan is a personal loan specifically designed for debt consolidation. You should apply for a consolidation loan that is large enough to cover all of your smaller, separate debts. If approved, you can use the consolidation loan to pay off your other debts so you’re left with only one monthly bill payment. 

You can generally use a consolidation loan to pay off different types of debt, including credit cards, personal loans, and overdue bills. Debt consolidation loans typically can not be used to pay off debts such as a mortgage or car loan. 

When applying for a consolidation loan, many lenders want to see a good credit score. If you have a poor credit score, you may find it more difficult to get approved at a rate that makes consolidating worthwhile. 

Credit card balance transfer 

With a balance transfer credit card, you can move balances from your other credit cards to a new one. Many balance transfer credit cards offer promotional periods where you pay a low interest rate or a 0% interest rate. If used strategically, you can save a lot of money by paying off as much of your balance as possible during the introductory period. 

Once the introductory period is over, the interest rate will change, and you will have to pay the standard credit card rate. 

You may also have to pay a balance transfer fee. This is typically a percentage of the amount you transfer, running from 1% to 5%. For instance, if you want to transfer $5,000 and the balance transfer fee is 3%, the balance transfer fee is $150. 

Debt Management Program (DMP)

Some credit counselling companies offer debt management programs (DMP). A DMP is an informal proposal that your credit counsellor makes with your creditors on your behalf. 

With a DMP, you can consolidate your debt into one affordable monthly payment. Your counsellor can also try to negotiate a reduction or elimination of your interest payments or extend the time to repay your debt. In many cases, you will have to pay back all of your debt. 

If your creditors agree to participate in the DMP, you will make regular payments to your credit counsellor, and they will pay your creditors accordingly. Before signing up for a DMP, make sure you ask about fees. You can calculate if the amount you could potentially save in interest is worth the fees that the credit counsellor charges for this service. 

Consolidation order

A consolidation order (also known as an orderly payment of debt (OPD)) is another form of debt consolidation that is legislated under the Bankruptcy and Insolvency Act (BIA) in Canada. This consolidation method is only available to residents in Alberta, Saskatchewan, Nova Scotia, and Prince Edward Island. 

With an OPD, the provincial court will combine your debts into one monthly payment. It’s up to you to pay the court who will pay your creditors on your behalf. The amount you pay will depend on your specific financial circumstances. 

Consumer Proposal 

A Consumer Proposal is a legal process that can only be administered by a Licensed Insolvency Trustee. In a proposal, you work with your LIT to develop an offer to pay your creditors a percentage of what you owe, extend the time you have to pay, or both. 

If your proposal is accepted, you will either make a lump sum or monthly payments to your LIT who will pay your creditors on your behalf. 

Unlike other consolidation methods, a Consumer Proposal offers protection against creditor legal actions including wage garnishment, lawsuits, and collection calls. As soon as you file, all of these actions will stop.

Should You Consolidate Your Debt?

Common questions about Debt Consolidation are: Will it affect my credit score and do I have to include all my debt in the process? Debt Consolidation does have an effect on your credit, but the extent of the impact depends on the type of consolidation you enter into. Also, including all of your debt into one, also varies depending on the type of program you choose.   

If you’re wondering if debt consolidation is right for you, speak with a Licensed Insolvency Trustee at Allan Marshall and Associates. We’ve been helping Canadians overcome their debt issues for over forty years, and we’re here to help you. If you have questions or want help navigating your debt, reach out today for a free, no-obligation consultation. You can give us a call at 1-888-371-8900 or contact us online.