Every day Licensed Insolvency Trustees help individuals and businesses assess their debt options. We understand that most people feel stressed and pressured to find a solution, and often don’t know where to start evaluating or even what their options might be! In today’s article we’ve outline the key pros and cons of five common debt solutions:
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Paying the Debt Off in Full
Pros:
- Beyond a great budget and the ability to stick to it, no outside help is needed.
- You may be able to negotiate reduced interest rates from lenders – be sure to ask about any credit rating impacts if interest rates are reduced.
Cons:
- If it’s difficult for you to pay substantially more than the minimum payment each month, it could take a long time to see a zero balance on your debt.
- Even a small upset to your budget can easily derail the best of plans and set you back in your debt-free goals.
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Getting a Bank Consolidation Loan
Pros:
- No more juggling multiple debts and payment due dates.
- Consolidation loans typically have a lower interest rate than credit cards.
Cons:
- You’ll be repaying the debts in full, plus interest which can be difficult to afford.
- Consolidation loans are often difficult to qualify for. Most people will need to pledge an asset as collateral against the consolidation loan, or get a co-signer, which can be risky as the co-signer will be held accountable if you are unable to pay.
- It’s critical to stop using credit while paying down the consolidation loan. Continuing to rely on credit after taking out a consolidation loan normally means the debt problem will worsen again over time.
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Using Credit Counselling Services
Pros:
- It’s much easier to qualify for a credit counselling program than a consolidation loan, and you won’t need to use an asset as security or get a co-signer.
- You’ll pay off all your debt, but creditors will often agree to stop charging interest.
- Educational resources and workshops for money management are available.
Cons:
- Creditors who turn down your debt management plan can continue collection action and will need to be paid separately.
- Government creditors (like Canada Revenue Agency or ICBC) will refuse to participate in ALL for-profit and non-profit credit counselling programs.
- A fee is charged for credit counselling services on top of the settlement payments to your creditors.
- Credit counselling organizations are heavily bank-funded and some are registered as collection agents, which certainly creates a conflict of objectives / conflict of interest.
- No government body regulates credit counsellor qualifications, fees or dispute mechanisms.
- Your credit history will be affected for at least 2-3 years after you have repaid the credit counselling plan.
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Make a Consumer Proposal
Pros:
- You may write-off a large portion (up to 80%+) of your consolidated debts (including government debts) with no interest charges or additional costs of administration.
- Legally prevents your creditors from contacting you for payment or continuing collection actions or wage garnishments.
- Flexible payment terms based on household income.
- Professional fees are included in what you repay – no fees added to your settlement offer.
- Can be paid off in full at any time without penalty.
- Credit rebuilding tools and money management education is included in the process.
Cons:
- You can’t make a Consumer Proposal on your own. Filing must be done through a Licensed Insolvency Trustee, Canada’s only government-endorsed debt professionals.
- Your credit history will reflect that you made a Consumer Proposal for 3 years after you have completed the Consumer Proposal, or 6 years from the date you started it (whichever comes first).
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File for Personal Bankruptcy
Pros:
- You may write-off 100% of your debts with zero interest.
- Bars creditors from contact, collection activity or wage garnishments.
- Most people who are considered “low-income” will only pay an administrative fee of $2,300 (broken into a manageable payment plan).
- The process typically lasts only nine months – the fastest compared to other options.
- Financial management and credit history resources are part of the process.
Cons:
- Your credit history will be affected for 6 years following your discharge. However, it’s important to note that with the right credit rebuilding strategies, most people are successful in rebuilding their credit within 2-3 years after a bankruptcy proceeding.
Use our free online Debt Options Calculator to get a simple breakdown comparing your debt options over a three-year period.
Ready to get started? Evaluate and choose your best debt option with the help of a licensed debt professional at Sands & Associates. Book your free consultation now!
