First off – what do we mean by ‘debt consolidation’? Debt consolidation is a term that you hear a lot, and it typically means that you combine all of your debt into a single monthly payment, rather than paying each of your debts separately each month. Under some debt consolidation plans, interest charges can be eliminated, and even the amount of debt you owe can be reduced!
From bank loans to Consumer Proposals, in Canada there are several different ways a person can choose to consolidate their debt. While consolidation options can vary greatly, before signing on to any debt consolidation program there are a number of very key questions that you should ask. It’s important to be able to advocate for yourself and gain awareness of your own rights and remedies – after all, knowing is not owing!
Learn about the 5 key questions to ensure a debt consolidation plan is right for you – before you sign:
Who Are You Working With?
Not all debt help professionals are created equal! Consumers need to be aware that there are many so-called ‘grey areas’ in the regulation of debt help. Find out the credentials and professional capacity of your debt management specialist to understand which areas of law and regulation will be on your side. For example:
- Banks & Credit Unions: The Financial Consumer Agency of Canada ensures compliance with consumer protection laws;
- Debt Repayment Agents (Debt Poolers): Overseen by Consumer Protection BC since 2016;
- Credit Counsellors: Some may be accredited by a national association, but no regulatory body exists;
- Licensed Insolvency Trustees: Regulated, overseen and licensed by the Office of the Superintendent of Bankruptcy (part of the Federal Government).
Did you know? The Government of Canada officially endorses only one debt professional to assist individuals in dealing with too much debt – a Licensed Insolvency Trustee.
What Debts are Being Consolidated?
You may have several different types of debts you want to deal with, be sure to confirm which ones you will be able to consolidate. For example, if you owe money for certain types of debts, as outlined below, only a Licensed Insolvency Trustee will be able to assist:
- Government debt such as income tax or GST balances;
- Student loans;
- A leased vehicle you no longer want to maintain.
Did you know? A Consumer Proposal allows you to write-off a portion of your consolidated debts. You may be able to settle your debts in full by paying as little as 20% of the overall debt, with no additional interest charges or costs of administration.
How Much Will it Cost You?
Interest rates and required fees can have a huge impact on how much you will wind up paying back. Be sure read to read the fine print and pay special attention to:
- Comparing the interest rate offered to the ones on your current debts (yes, sometimes the consolidation rate is higher!);
- Costs if you miss or postpone a payment;
- Any administrative or registration charges;
- Any Professional services fees being charged.
Did you know? In a Consumer Proposal, Licensed Insolvency Trustee fees are paid from the money your creditors receive, so there is no extra cost to you beyond what you’re offering to repay to your creditors.
What Else is in the Fine Print?
Ask about any other conditions that come with your consolidation agreement. Common requirements may include:
- Needing a cosigner or asset to pledge as security against a bank loan;
- Keeping your tax returns filed (and paid) up-to-date;
- Participating in financial counselling sessions.
Remember that your needs are key! If you need to stop a wage garnishment or write-off some of your debt in order to make things manageable, a Consumer Proposal could be a better consolidation choice than a bank loan.
Is There an Exit Option?
Unforeseen circumstances can and do occur – find out what may happen if you can no longer maintain the consolidation agreement. This can vary greatly depending on the type of consolidation. Some examples may include:
- Collection action and co-signer being forced to pay (bank loan);
- Loss of an asset (bank loan);
- Needing to repay the original debts.
Quick Tip! Be proactive and seek professional debt advice early on – the right advice can save you a lot of time, stress, and money.
Be sure to ask any and all questions you have before signing official documents. If you’re working with a reputable professional they should be more than willing to take the time to address any concerns you have, and you should never feel pressured. Trust your instincts!
Learn more about Getting Out of Debt Without Bankruptcy.