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What is Debt Consolidation Loan
A Debt Consolidation loan is a new loan that is raised to pay off the amounts owing on a number of existing loans. The purpose of this is to try and get an overall lower interest rate as some loans, especially department store cards have very high interest rates. The following example illustrates the point:
|Loan Type||Amount Owing||Interest Rate||Annual Interest|
|Store Card||$ 6000||29%||$ 1740|
|Credit Card||$ 7000||20%||$ 1400|
|Other loan||$ 10000||12%||$ 1200|
|Total Existing||$ 23000||$ 4340|
|New Loan||$ 23000||14%||$ 3220|
|Interest Savings||$ 1120|
If you were able to get a new loan at 14% then you would save $ 1120 in interest charges each year
Key Features of a Consumer Proposal and Debt Consolidation Loan
Impact on Amount Owing
- Using a debt consolidation loan does not reduce the amount of money you owe. At best it reduces the annual interest you pay
- Under a Consumer Proposal the amount you owe will generally be reduced by anywhere between 50% and 70 %
- You will continue paying interest on the new loan although the interest may be lower
- Interest charges stop once your proposal is accepted and no new charges are incurred
Raising a New Consolidation Loan
- In practice this may be difficult as the new lender may consider you a higher risk due to the size of the loan and especially if you have missed past payments on repaying your existing debt
- This could mean that you will not be able to get the lower interest rate used in the example above
- In addition the new lender may require some form of security such as a second mortgage over your house
- Alternately a family member may be required to co-sign on the new loan, meaning that they will be partly responsible for your debts if you default
- With a new consolidation loan, any existing legal actions such as a wage garnishment will continue in force – they do not stop unless a settlement is reached with that individual creditor
- Under a consumer proposal, ALL legal actions cease the date you file your proposal.
- If you were subject to a wage garnishment then this is stayed and you will resume getting your full wages
Early Pay Down
- Under a consumer proposal you have the ability to pay down or pay your proposal off in full without any penalty.
Impact on Credit Score
- There will be no impact on your credit score, if when you do a new consolidation loan, you have not missed any payments on any of your previous loans. If you had missed payments then you credit score will already have been impacted.
- Under a consumer proposal your credit score will be affected when you file your proposal
In summary, if there is a possibility that you will fall behind in your payments on your new consolidation loan and that repayment in full within a reasonable time-frame is unlikely then, this option may not be the best one for you. A consumer proposal may be a better solution given all the benefits and protection is offers you.
Is Debt Consolidation the Right Debt Relief Option for me?
When you have a high amount of debt and you’re having difficulty paying your bills, you likely feel stress. You worry about how you’re going to make payments as they become due, how you’re going to afford your expenses and how you’re going to make ends meet. You may even worry about what you will do if creditors and collection agencies start calling. On top of all of this, you’re likely thinking about debt relief options and maybe considering a consumer proposal or bankruptcy as well besides consolidating all debts into a new loan.
All of this stress adds up. Many studies have shown that debt causes high amounts of stress and it’s been proven that high stress levels can lead to a variety of health and medical issues.
The good news is that you don’t need to feel stressed about debt if you cannot repay it as there are debt relief options, such as consumer proposal or bankruptcy, available to you. While these options may seem confusing and possibly even intimidating, that doesn’t have to be the case. Speaking with a licensed trustee in bankruptcy can help you understand the differences between these two processes and allow you to determine if either process is the right one for you.
Consumer Proposal or Bankruptcy?
Every financial situation is different. This means that debt relief solutions will be different for each person. There is no way to make a blanket statement that one option is better than the other or that one option is always preferable. It depends on your unique circumstances.
Most trustees in bankruptcy offer a free consultation where they will sit with you and review your financial situation. Once the trustee has completed his or her review, he or she will let you know which debt relief options are available to you. These options may include consumer proposal or bankruptcy, but other options could be included as well. Bankruptcy trustees are bound by a strict code of ethics and are required to inform you of all possible options, not just those that they can assist you with.
When it comes to choosing between consumer proposal or bankruptcy, you’ll need to consider the details of each of these options before you make a decision.
Consumer Proposal as an Alternative to Debt Consolidation?
A consumer proposal is a legal process through which you make an offer to your unsecured creditors. In most consumer proposals, you offer to repay a portion of the debt owing over a specific period of time. This amount is based on what you can afford to pay. If your creditors agree to your proposal, once you made all your payments and completed your other duties, the proposal is deemed complete, and your remaining outstanding debts are eliminated.
This process is helpful for people who are able to repay their creditors some of the money that is owed to them, but not the entire amount. With a consumer proposal, if the majority of your unsecured creditors vote to accept the offer, then all of them are bound by the terms of the proposal.
Once the proposal is accepted, your monthly payments do not change, regardless of your income. However, you can choose to repay the proposal more quickly if that’s possible for you.
What is Bankruptcy?
Bankruptcy is also a legal process. In this process, a person who is unable to repay his or her debts is given an opportunity to eliminate most (and potentially all) of these debts and start fresh.
With a bankruptcy, you may lose some assets. However, assets that are considered necessary to live a basic lifestyle are considered exempt in most provinces. Each province maintains different lists for which items are exempt and their value. Your trustee will inform you of these details before you file.
With a bankruptcy, you need to report your income and expenses to your trustee on a monthly basis. If your income is above a certain level that is set by the government, you will be required to make surplus income payments. Your trustee will let you know if this is necessary.
Making the Choice
It’s important to remember that it is always your decision as to how you wish to proceed with your financial future. Bankruptcy trustees are there to provide you with information and assist you in filing for consumer proposal or bankruptcy, if that is what you decide to do. However, the information provided is given so that you can make an informed decision for yourself and your future. No one should ever pressure you to choose one option over another.
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