Contact A Licensed Insolvency Trustee
The Trustee will provide a free confidential consultation and review your financial situation and discuss your options, including budgeting assistance or a referral to a non-profit credit counselling agency if you are in the early stages of financial difficulty. It might even be to get a consolidation loan from a financial institution. These options may help you get back on track and keep your;;in good standing.;;
However, if your debts are too high or in collections, the Trustee may recommend personal bankruptcy or consumer proposal to help deal with your debts. Your Trustee will explain the pros and cons of each option, so you can make the decision that best meets your needs.
Debt Consolidation Advantages And Disadvantages
While debt consolidation is one of the less drastic debt management solutions that you can access in Canada, its important to weigh its pros and cons:
- Can reduce the amount of debt payments and interest to keep track off
- Loans may come with lower interest rates than other payment products
- May reduce your , which is good for your credit score
- Making timely loan payments can also increase your credit score
- Debt consolidation programs can include free credit counselling courses;
- Less harmful to your credit and finances than other debt management solutions
- Doesnt clear your debt
- Youre not guaranteed to qualify for a lower interest rate than other debt solutions;
- Missing debt consolidation loan payments can damage your credit score
- Any credit accounts being consolidated will receive an R7 credit rating
- A lower credit rating = less creditworthiness when you apply for new credit
Debt Consolidation Vs Bankruptcy
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When considering your options to deal with debt, many people will explore the idea of a debt consolidation loan before considering bankruptcy. Whether a debt consolidation loan or bankruptcy is right for you depends on how much you owe and how much you can afford to repay. There is also a third option between a debt consolidation loan and bankruptcy a consumer proposal.; A consumer proposal provides the benefits of debt consolidation with the debt relief of bankruptcy.
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Making Extra Monthly Payments
Another strategy for getting out of debt quickly is to make extra monthly payments, as youre able. This allows you to pay off your loans faster and saves you money in the long run since the faster you pay down your balance, the less interest fees youll be accumulating. You could save even more by prioritizing your highest interest debts and putting the extra payments toward resolving those first.. This approach; is called the debt avalanche method.
Bankruptcy: The Most Dramatic Choice
McShane worked with another marketing professor at Northwestern, David Gal, to identify the extremes people will take to get themselves out from under debt.
At one extreme, there are consumers who can afford to pay off their debts over time from savings and income without any changes to the structure of their debts, Professors McShane and Gal said.
This strategy requires substantial lifestyle changes. But not everyone has a tech patent up their sleeve, a long-lost millionaire uncle, or debt that can be dissolved by not eating out for six months.
At the other extreme, the professors say, there are consumers who choose to walk away from their debts, either by defaulting or by declaring bankruptcy.
There are good reasons people choose bankruptcy. A 2016 study by the American Bankruptcy Institute found that nearly 500,000 people filed for Chapter 7 bankruptcy and 95.5% of them had their debts discharged. That means they walked away debt free.
The same study found that individuals who used Chapter 13 bankruptcy didnt have as much success, but more had their debt discharged than didnt .
In a Chapter 7 bankruptcy, with the aid of a bankruptcy attorney, you get a fresh start by exposing all your assets to a trustee collecting for creditors. A Chapter 13 bankruptcy, for those with regular income, allows you to keep some assets and pay off your debt over time.
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Working With A Debt Settlement Company
There are companies you can hire or work with to consolidate debt. They can negotiate with your creditors, complete the consolidation process, and work on a debt management plan for you. Some credit counseling agencies may also offer these services. Note that not all of these companies are honest; you need to watch out for scams.
Pros of debt settlement companies:
- You don’t have to spend time consolidating or negotiating
- Your credit counselor can educate you on improving personal finance
- Paying back a large amount of debt can feel more achievable with support
- They can handle calls or other harassment from debt collectors
Cons of debt settlement companies:
- Some of these companies are scams and should be avoided and reported
- The legit companies may be expensive and require upfront fees and monthly payments for their services
- Companies cannot stop wage garnishment
- Debt like medical bills and credit cards are not dismissed
- Your credit report will still be affected if you cannot make monthly payments
- It can extend the time you spend in debt
Bank Requirements For Consolidating Debt
Once you have visited the bank or financial institution and provided the information listed above, the bank will check this and other factors to determine if you qualify for a debt consolidation loan. The bank will review your credit score, your debt service ratio and your employment status. They are looking to see if you can afford to pay for the consolidation loan you are seeking.
To make the application process easier, you should also bring the following information to the meeting:
- Your most recent income tax assessment
- A recent pay stub
- Any information about your assets
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Difference Between Debt Consolidation And Bankruptcy
Bankruptcy can be brought into itself by the debtor or can be forced by the court where debt is honoured anyway of debt restructuring or surrendering of asset while Debt consolidation is a form of refinancing where the entity borrows mostly unsecured family debt to pay off the old outstanding liabilities and consumer debts thus multiple debts are combined into single larger debt with favourable terms.
Bankruptcy is a process where an organization declares that they cannot repay its debt while Debt consolidation is a method of taking out new loans to pay off old debt.
Will A Debt Consolidation Loan Hurt My Credit
Yes, debt consolidation loanscan hurt your creditbut not for the reasons you might think. Your FICO score will be slightly reduced because taking out any kind of new loan will cause your credit rating to dip. Thus, to some degree, these loans can make it more difficult if youre looking to borrow money in the near future. Your credit may also be hurt if you fail to make your monthly payments on time. If you dont think you have the discipline to keep up with these payments or cant afford to pay back what you owe, debt settlement might be a better option for you.
Learn About Your Alternatives To Debt Consolidation Such As Consumer Proposal
One alternative to debt consolidation is consumer proposal a uniquely Canadian debt solution. A consumer proposal is a settlement arrangement offered to your creditors that stops the interest and allows you to make one monthly payment you can afford. Consumer proposals can only be filed through Licensed Insolvency Trustees.
A Trustee can also advise you on any other solutions that may apply to your particular situation, such as personal bankruptcy.
Visiting a Licensed Insolvency Trustee will ensure that whichever option you choose, you will have all the information you need to make an informed decision. Your first appointment with a Trustee is free, no-obligation, and confidential.
Use Caution When Shopping For Debt Relief Services
Avoid any debt relief organization whether its credit counseling, debt settlement, or any other service that:
- charges any fees before it settles your debts or enters you into a DMP plan
- pressures you to make “voluntary contributions,” which is really another name for fees
- touts a “new government program” to bail out personal credit card debt
- guarantees it can make your unsecured debt go away
- tells you to stop communicating with your creditors, but doesnt explain the serious consequences
- tells you it can stop all debt collection calls and lawsuits
- guarantees that your unsecured debts can be paid off for pennies on the dollar
- wont send you free information about the services it provides without requiring you to provide personal financial information, like your credit card account numbers, and balances
- tries to enroll you in a debt relief program without reviewing your financial situation with you
- offers to enroll you in a DMP without teaching you budgeting and money management skills
- demands that you make payments into a DMP before your creditors have accepted you into the program
If Your Debts Are Manageable
If youre tired of making monthly payments but are generally financially secure, a consolidation loan is likely your best bet. If you have great credit, you may even qualify to lower your interest rate, monthly payments, or both.
Bankruptcy Provides A Fresh Start
The other main advantage of filing for bankruptcy is that it wipes the slate completely clean. Not only is the financial burden lifted when your debts are discharged so is the heavy psychological burden that comes from months, years, or even decades of sleepless nights worrying about how to make ends meet. With most of your significant debt sources eliminated, you can start clean again by keeping up timely payments on your loans. By staying on top of your finances, you can quickly begin to rebuild healthy credit.
Debt consolidation does impact your credit score to the same degree as filing for bankruptcy. If you are frequently behind on your bills, which is true of many people considering Chapter 7 or Chapter 13, your credit is already severely damaged. Bankruptcy gives you the ability to start improving the situation by removing many of your financial obligations. Additionally, if you combine all your debt into one loan, it might take a considerable amount of time to complete your payments. A bankruptcy, even a Chapter 13, is typically a much faster process. This allows you to begin building good credit quicker and move on with your life.
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Borrowing From Friends And Family
While borrowing from friends and family can be tricky to navigate, it may be a good option if youre facing severe financial difficulties. The main advantage is that when borrowing from a loved one, youll avoid the heavy interest rates and fees that come with most loans. However, borrowing from those close to you can lead to strained relationships if you arent able to repay them promptly. If you choose to go this route, we recommend setting clear repayment terms.
Is A Debt Consolidation Loan Right For Me
If you have great credit and can qualify for favorable loan terms this could be a good option for you. Adebt consolidation loan will allow you to reduce the number of creditors you have to deal with at one time by restructuring your debts into a single lender and payment. However, its also a good idea to consider all of your options before making a decision.
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The Pros And Cons Of Consumer Proposals
Lets look at the advantages of a consumer proposal and then talk about some of the negative sides of using this debt reduction tactic.
Here are the key advantages of a consumer proposal:
- A consumer proposal often reduces overall debt owing.
- A consumer proposal stops collection action.
- A consumer proposal stops wage garnishments.
- The proposal is repaid with zero interest.
- The proposal can be repaid quicker with no penalties.
- A consumer proposal is filed with a Licensed Insolvency trustee, who is an officer of the court so legal protection is provided from your creditors.
The biggest disadvantage of consumer proposals is that they will impact your credit rating and damage your relationship with creditors.
If youre drowning in debt, your credit rating might be the last thing on your mind.
But its a small world out there, so you shouldnt use a consumer proposal without considering the consequences. Because major creditors are not being paid according to the original terms and conditions of your loan and they are usually accepting less than what they are owed, they may not do business with you in the future.
In addition, the consumer proposal will be reported on your credit report as an R7 for three years from the date it is paid in full.
If you owe a lot of money, this tradeoff tends to make sense. While having a good credit rating is important, it means nothing if youll be stuck on a debt treadmill for the next decade.
How Resolve Can Help
If youre dealing with debt and not sure what to do, were here to help. Become a Resolve member and well contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.
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Debt Consolidation Vs Bankruptcy: Which Is The Better Option
Jenna Taubel About The Author
It is extremely stressful when youre struggling to afford your payments every month. Its natural to want to wipe the slate clean and start fresh. There is more than one way to accomplish starting fresh with your finances. The two most common solutions people consider are debt consolidation and bankruptcy. Each option has their pros and cons, and depending upon your specific situation either bankruptcy or debt consolidation can be a reasonable option.
The best way to explore the differences between debt consolidation vs bankruptcy as a debt management solution is to first identify the advantages and disadvantages of each option. Then you will be able to easily determine which debt management option will be the best for your specific financial situation.
Debt Consolidation Vs Bankruptcy: The Difference
Debt consolidation works by combining all of your debts into one monthly payment. It comes with one interest rate and one set of rules. A debt consolidation company will buy your debts for one set amount; this is essentially a form of a loan.
Debt consolidation has several advantages.
If large debts are threatening your finances, you may be considering bankruptcy as a means of easing the strain. However, bankruptcy will ruin your credit score and force you to surrender particular possessions. Also, it can restrict your options for jobs, mortgages, and cell phone contracts. Bankruptcy should always be a last resort.
Debt consolidation may allow you to pay off your debt without breaking the bank, which will help you to repair your credit history. Learn more about which debt relief option is right for you today.
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The Debt Settlement Agency Takes Their Cut First
Yes, you read that right. Even if your debt settlement agency is able to settle all of your debt for you, when you pay the monthly payment to the agency, the agency takes their percentage and then disburses the rest to your creditors. This means your creditors get paid only a small amount each month.
While this does not seem problematic on its face, if your debts are in collection chances are that your debt has been sold to or is being administered by a debt collection agency. These agencies do not have the infrastructure to accept and account for small monthly payments over time and so are not willing to wait for payment.
Some debt settlement agencies take a step further by calculating their total fee and applying your monthly payments to their fee first, leaving your creditors unpaid for months! While this is prohibited by the Federal Trade Commission, be sure to read the fine print if you opt to work with a debt settlement agency.
Which Is Better: Bankruptcy Or Debt Consolidation
When determining whether to choose bankruptcy or debt consolidation, each borrowers individual financial situation will be a dominating consideration. Some of the factors to consider include:
- Individuals with a higher credit score can benefit from more competitive terms on a debt consolidation loan.
- Income predictability: Individuals with unpredictable income and potential for job loss might be better suited to Chapter 7 bankruptcy, if they qualify.
- Amount of debt: Consolidated debt must still be paid back, so if the debt burden is too high, then a Chapter 7 or a Chapter 13 filing might be better options.
- Overall financial health: Debt consolidation works well for those in stable financial situations. But if youre buried in debt and cant find any other reasonable path out, bankruptcy may be an option worth exploring.
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