Month: March 2011

Credit Counselling & Debt Management Plans. Right Solution?

credit counselling and debt management plan

Not everyone who contacts us needs to file a bankruptcy or proposal. In many cases we direct people to a better solution based on their situation. An option we review with you is a debt management plan through a not-for-profit credit counselling agency.

Dealing with your debts through credit counselling can make sense if:

  • you do not owe a lot of money to your creditors,
  • you have only one or two debts that you need help with
  • you have fallen behind on your payments, but feel you are able pay them in full now.

How Credit Counselling Works

A credit counsellor will contact your creditors and help arrange a debt management plan that allows you to repay your debts in full over a period of time. This arrangement is voluntary and is not legally binding on you or your creditors.

A credit counsellor is not able to settle your debts for less than the full amount owing, but is often able to negotiate a lower interest rate during your repayment period. A debt management plan will not work if you have a tax debt with Revenue Canada. A debt management plan will be reported to the credit bureau and will reflect negatively on your credit record.

For an updated look at how credit counselling works today, see our podcast Are Credit Counselling Agencies Just Debt Collectors?

Finding a Reputable Credit Counsellor

If you feel that you have the ability to repay your debts in full but need help dealing with your creditors then your next step should be to contact a credit counsellor. Finding a reputable credit counsellor is not always easy. If you do an internet search for credit counselors in your area, you will likely get hundreds of hits. Word of mouth or a referral is a good way to find someone. We have a list of local, reputable credit counsellors that we have dealt with personally, and can refer you to.

When looking for a credit counselor, there are a few things to keep in mind. First of all, how much will you pay in fees? Is there an up front consultation fee? Annual or monthly “membership” fee? Monthly service fee? When you call to make your first appointment be sure to ask if there is a consultation fee.

Also, it is not a good idea to start making debt management payments until your credit counsellor has confirmation from each of your creditors that they are willing to participate in the program and exactly how much they agree to accept each month. I often meet with people that have entered into a debt management plan and after making several monthly payments, their credit counsellor contacts them to tell them that their monthly payment will need to be increased. This happens because one or more of your creditors did not accept the amount that the counsellor offered them initially and will only agree to your debt management plan if you increase your monthly payment. Beware of debt consultant scams where the debt consultant takes your money, but doesn’t actually do anything.

Can You Afford The Payments?

Is credit counselling a solution? Say you owe $15,000 to your creditors. If you decided to pay down this debt on your own over three years, you could expect payments of approximately $680 a month. If a credit counsellor could get all of your creditors to agree to stop interest and allow you to repay this debt over three years, you could expect to pay approximately $420 a month. This is a good solution if you can afford the $420 a month for 3 years. Unfortunately a lot of people I meet with are unable to maintain their debt management payments because their living expenses are higher than they thought or because their income fell during the 3 year timeframe.

Consider a Consumer Proposal as an Option

A debt management plan is a good solution if you can afford to pay all of your debts in full, but just need a break on the interest. If you can’t repay the debt in full, an alternative and better option may be a consumer proposal.

A consumer proposal is a settlement of your debts and is legally binding on all your creditors, including Revenue Canada. A consumer proposal ensures that all of your creditors are treated fairly; one creditor does not have the ability to demand a higher payment than your other creditors. A consumer proposal can only be filed by a licensed insolvency trustee; a credit counsellor cannot file it for you. The payments in a proposal on that same $15,000 of debt would be significantly less than a debt management plan, possibly as low as $200 a month for 36 months.

Understanding your options will help you pick the solution that works best for you. Everybody’s situation is different. Contact us for a free, no-obligation consultation. Let us help you find debt relief.

Debt Consolidation vs Bankruptcy. Which is Better?

A graphic showing debt consolidation loans vs bankruptcy

Bankruptcy and debt consolidation are two very different approaches to debt relief. Bankruptcy is a legal process that discharges your debt obligations while a debt consolidation loan restructures debt payments making them more affordable. In this article, I’ll review the differences between each option and present a third alternative – a consumer proposal. A consumer proposal provides the benefits of debt consolidation with the debt relief of bankruptcy.

How debt consolidation works

Debt consolidation involves taking out a new consolidation loan to pay off multiple debts. Debt consolidation options can include an unsecured bank loan, secured loan, second mortgage or home equity loan.

The main advantage of a debt consolidation loan, if done properly, is that it saves you money helping you to get out of debt sooner. Debt consolidation is only a good option if the interest rate you pay on your consolidation loan is lower than the interest rate on your credit cards, payday loans or whatever other debts you combine. By paying less interest you can eliminate credit card debt faster.

There are risks with a debt consolidation loan. You may not qualify or may need a co-signer. Any consolidation lender will want to see you have a steady income, employment, and a good credit rating before approving the loan. You may not have enough security or collateral to support a consolidation loan.

Unlike with bankruptcy, your debts do not go away with a debt consolidation loan until you pay off your new loan in full. Your monthly payment with a debt consolidation loan may also be higher than a bankruptcy.

How bankruptcy works

Bankruptcy is a legal process where you surrender your assets in exchange for the discharge of your debts. Bankruptcy is filed through a Licensed Insolvency Trustee who will help you complete the application to go bankrupt, file your bankruptcy with the court and notify your creditors. A note that you filed for bankruptcy will appear on your credit report and remain for six years.

With personal bankruptcy, you are clearing yourself of all the debts as opposed to refinancing them through a debt consolidation loan. You don’t need to qualify to file for bankruptcy; it’s a choice you make.

Bankruptcy is best suited for an individual who cannot afford to repay their debts. Bankruptcy also provides protection from creditor actions like wage garnishments.

If this is your first bankruptcy, your bankruptcy can be completed in as little as nine months. This is extended to 21 months if you have a high surplus income.

Options between bankruptcy and debt consolidation

However, as mentioned, there is a solution available under the Bankruptcy & Insolvency Act between a debt consolidation loan and bankruptcy and that is a consumer proposal.

A consumer proposal is another way to consolidate debts without filing bankruptcy.

In the same way a debt consolidation loan groups all your debt payments, a consumer proposal can consolidate debt except this time, instead of paying all the principal debts plus interest, you’re only paying back what you offer to pay back. That’s because a consumer proposal is a form of debt settlement that is legally binding. A consumer proposal is a credit consolidation option that reduces your debt. It gives you reduced monthly payments and creditor protection.

Bankruptcy or debt consolidation. Which should I choose?

Finding the right debt management solution for any debt problem depends on your specific circumstances. Whether a debt consolidation loan or bankruptcy is right for you depends on how much you owe and how much you can afford to repay.

Remember:

  • Debt consolidation does not eliminate debt while bankruptcy does
  • Debt consolidation does not provide creditor protection unlike bankruptcy
  • A consumer proposal provides the benefits of debt consolidation with the debt relief of bankruptcy.

If your debt load is overwhelming and you can’t afford the monthly payments on a debt consolidation loan, then bankruptcy is an option. While you may worry about the impact of a bankruptcy or consumer proposal on your credit score or record, you need to consider an alternative that will give you the fresh start you need.

Contact us today for a free consultation to discuss the pros and cons of consolidating your debt with a loan versus bankruptcy or perhaps an alternative of making a consumer proposal. Let’s get started on creating your debt-free plan.