Taking time to research and compare your options can be a sound strategy in many financial situations – from major purchases to borrowing to retirement planning, and, of course, when it comes to seeking a solution to help better manage your debt.
The landscape of debt solutions for British Columbians is far from being a level field, and what you don’t know can cost you – sometimes a lot! Whether you are actively looking for a debt management strategy or are curious about some of the main differences in options, read on to learn what you should know about debt solutions in BC, and key points of consideration when you’re shopping around to find the plan that will work best for you.
When to Consider Debt Consolidation and Other Solutions
Unless there are clear signs of a debt problem that can’t be ignored, such as a wage garnishment or a creditor taking you to court, many people are unsure as to whether their debt or financial situation is “bad enough” that they could benefit from seeking professional debt help or a debt management plan.
Take note if any of the following seems familiar – without action situations such as these often escalate:
- Your current pace of repayment would have you making debt payments for more than 5 years on non-mortgage debts.
- You’re unable to make much more (or only just) minimum monthly payments on your debts.
- Your credit balances don’t change much because you’re constantly using credit, even to meet your regular monthly expenses.
- Your credit score is taking hits due to large debts or an unbalanced debt-to-income ratio.
- You’re carrying “high-risk” debts such as payday loans or government debts.
- You’re feeling stressed, anxious or constantly thinking about your debt.
As Licensed Insolvency Trustees we hear from BC residents looking for solutions and advice in dealing with their debts daily. Simply put, if you think you might need help, or suspect your debts are becoming a problem – you’re probably right.
Popular Consolidation and Credit Solutions
Turning to a bank or other lender for debt help is a strategy many people consider in the early stages of looking for a debt solution. Although your bank may be able to offer you a credit product to refinance your debt, lender-based solutions are limited in that you will almost always be required to:
- Possess a credit rating that is favourable enough to meet lender eligibility/borrowing standards.
- Offer an asset as collateral for your refinanced debt. Common examples of this include:
- Allowing the lender to hold your vehicle as collateral for a consolidation loan.
- Borrowing against your home equity with a line of credit, a refinanced mortgage, or taking out a second or third mortgage.
- Have a co-signer share in responsibility for your consolidated debt.
When is Bank-Based Debt Consolidation a Bad Choice?
Before committing to any lending agreements (or debt management services in general), it’s essential to consider your specific situation and identify your needs, as well as your overall goals. In our experience as Licensed Insolvency Trustees we work with many British Columbians who were not able to maintain their lender-based debt consolidation, and ultimately found a more suitable solution in options such as a Consumer Proposal or even bankruptcy.
If you find yourself facing a situation where you simply cannot afford any meaningful debt repayment, personal bankruptcy is a debt solution that can help you get a financial fresh start. Many people are surprised to learn that in Canada the bankruptcy process is quite straight-forward, highly private, and may be completed in as little as 9 months.
Even if you meet the eligibility discussed previously, the cost and monthly payments of bank or lender-based debt solutions are a common challenge for many people. Consider the following to establish your basic criteria, and potentially avoid an unsuccessful solution:
- Can you afford to repay 100% of your debt (plus interest charges) by making consistent monthly payments over the next 2-7 years?
- Are all your debts from credit such as credit cards, lines of credit or overdrafts? What about government debts such as outstanding tax debts, student loans or ICBC debt?
- Have you fallen behind in any of your payments, or are any of your creditors threatening you with collection or legal action?
- How confident are you that you won’t take on any new debt until these current debts are paid off?
Make sure you are certain you can afford the payments you are agreeing to, and that you clearly understand all the terms of your agreement. Be especially careful when it comes to the following areas:
- How would your new monthly payment compare to your current payments? Could you comfortably support your household and your debt repayments?
- Are you sensing any high-pressure sales tactics or representatives pushing you to sign right away?
Consolidate Without Borrowing
Although many Canadians are not aware, we have options that make it possible to consolidate debt without needing to borrow. This can be especially useful for those who want to cut down their monthly payments by eliminating ongoing interest charges. Non-borrowing consolidation options include:
Credit Counselling Plans: A credit counsellor will put together a plan to consolidate your eligible debts. Usually you are required to repay 100% of your debt in addition to a fee to the counsellor or their non-profit society, but will get a break on interest charges. You can also expect to receive some financial literacy education and support.
- There can be major drawbacks to credit counselling, such as the lack of ability to cut debt, enforce a stop on interest charges or creditor protection, the limited types of eligible debts (i.e., taxes, student loans), and more.
Consumer Proposals: Work with a Licensed Insolvency Trustee to consolidate and reduce virtually all your debt down to what you can afford (this is the only consolidation option to include and reduce government debt) and creditors will write-off the rest. Zero interest or other fees are added to your payments.
You’ll be provided private one-on-one financial counselling services, allowing you access to knowledge and resources around credit scores, improving spending, savings strategies and more.
- Repayment requirements usually range anywhere from 30-50% of your total debt.
What’s the Cheapest Way to Consolidate Debt?
Getting out of debt when you have little (or no) money can seem impossible – but the good news is that it is possible, even without paying added fees, interest or referral costs.
A Consumer Proposal combines the benefits of debt consolidation loans with Canadian consumer rights law, resulting in a powerful debt solution that you can use to manage your debt, with a plan tailored for your individual situation. What’s more, the monthly payment needed to pay off your debt for good is usually by far the lowest with a Consumer Proposal.
Here’s an example illustrating the difference in monthly payments dealing with $25,000 debt, between a bank consolidation loan, credit counselling plan, and Consumer Proposal. You can see how much impact not only cutting interest charges but your overall debt can have.
Consolidating $25,000 non-mortgage debt with the goal of having it fully paid off in 48 months:
- With an 8% interest rate consolidation loan, monthly payments are roughly $610.
- Paying no interest in a credit counselling plan, monthly payments are approximately $520 + fees.
- A no-added-fee Consumer Proposal that repays 40% interest-free (with the unpaid $15,000 forgiven/written-off by your creditors), has monthly payments that are around $208, all inclusive.
Dealing with debt and researching debt solutions can feel overwhelming, or even hopeless. It can be very tempting to simply sign on for a consolidation option or settlement offer right away, even if the solution may not really meet your needs. Don’t be discouraged – you do have options that can help you achieve your debt-free goals, and you can connect with a BC Licensed Insolvency Trustee for free advice at any time.
Ready to be debt-free? You’ve got support and solutions with Sands & Associates. Connect with a local Licensed Insolvency Trustee today, even from the comfort of home – book your free confidential debt consultation now.