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Many people find it’s difficult to pay off debt when they are juggling multiple creditors and debt payments monthly, each with their own set of fees and interest charges. If debt consolidation is a debt management tool you are considering, you may be surprised to hear that there is more than one way to consolidate consumer debt.

How Does Debt Consolidation Work?

Debt consolidation is a way to combine multiple debts into one new loan, or settlement, depending on the type of consolidation being used. Not all types of debts can be consolidated the same way – the debt consolidation option most suitable will depend on the person, their unique personal circumstances, and their debts.

Three Debt Consolidation Options in Canada

Debt Consolidation Loan

  • A bank or other traditional lender may be willing to give you a consolidation loan. Typically, the new lender will pay off the individual creditors and you will then owe the new lender for this combined balance, plus interest charged by the new lender.
  • The benefit is normally that you are able to negotiate a reduced interest rate – quite often consolidation loans can reduce interest payments from 19-29% annuals on a typical credit card to approximately 10-15% annually on a consolidation loan.
  • The new lender may require you to pledge an asset, such as a vehicle, as collateral for the consolidation loan.
  • Bank debt consolidation loans mean that you will repay all your debts in full, plus interest.
  • You may find it difficult to qualify for a debt consolidation loan if:
    • You do not have an asset to pledge;
    • Your income is low, or inconsistent;
    • Your credit rating is poor.
  • Example: on a $20,000 consumer debt, a consolidation loan might require payments of around $660 per month over a three year period.

Credit Counselling Consolidation – A.K.A. “Debt Management Plan”

  • Private and non-profit credit counsellors may help you arrange a consolidated settlement with your creditors, excluding any amounts owing to Government (i.e. taxes, student loans)
  • Known as a “debt management plan”, there is no ‘consolidation loan’ per se. Rather, the Credit Counsellor will negotiate individually with each debt to attempt to achieve an interest freeze and a payment plan in full over a five year period.
  • Creditors who do not agree to the settlement will need to continue to be paid outside of the debt management plan.
  • Creditors agreeing to the credit counselling program will typically not charge further interest.
  • Private and not-for-profit credit counsellors will charge fees for their debt services.
  • Credit counselling debt consolidation will require you to repay all your debts in full, plus the credit counsellor fees, but the interest may be stopped.
  • A credit counselling program will be reflected on your credit history for two years from the date of completion and will reflect as an R7 (similar impact to a Consumer Proposal, discussed later in this article).
  • You may find credit counselling difficult if:
    • You cannot repay all your debts in full, plus the service fees;
    • Some of your creditors will not agree to the plan;
    • You have government debts.
  • Example: on a $20,000 consumer debt, credit counselling consolidation might require payments of around $550 per month over a three year period.

Consumer Proposal Debt Consolidation

  • A Licensed Insolvency Trustee will file a Consumer Proposal, which will combine all your debts into one legal debt settlement, and cut the amount you repay by up to 80%.
  • Interest must be stopped, by law.
  • Consumer Proposals are the only way to reduce government debts for things like student loans, or income taxes.
  • Consumer Proposals generally require you to repay only a portion of your debts, but settles the balances in full, with no interest or additional fees.
  • Licensed Insolvency Trustee’s fees are set by government tariff and are normally paid from the funds received by creditors. There is generally no additional cost to you the individual, besides what you elect to offer creditors under the consolidated Consumer Proposal settlement.
  • A Consumer Proposal will be reflected on your credit history for three years from the date of completion or six years from the date of filing – whichever comes first.
    • Credit rating rebuilding tools and resources are provided as part of the Consumer Proposal.
  • You may find a Consumer Proposal challenging if:
    • You do not have any income;
    • There is no third party (ie. family or friend) able to assist you with the settlement.
  • Example: on a $20,000 consumer debt, a Consumer Proposal consolidation might require payments of around $160 per month over a three year period.

If your income does not allow you to make any payments on your debt, a personal bankruptcy can also be a good option to consolidate all your debts into one legal process. 

As federally regulated Licensed Insolvency Trustees, Sands & Associates are experts in debt consolidation services, including Consumer Proposals and personal bankruptcy. Meet with a friendly debt expert in one of our BC office locations today for a free, confidential debt consultation!