Introduction
Financial obligations of any kind of size can be stressful. Most of us have some existing debt. It is when debt is out of control that gives people problems. People with debt problems ask me for my opinion on filing bankruptcy versus debt consolidation. So, I thought I would share my thoughts with you.
What is debt consolidation?
The first step is understanding what debt consolidation is (and isn’t). Debt consolidation is a do-it-yourself strategy that you control. Debt consolidation is a form of debt restructuring that combines several loans into one, mainly for two reasons: (i) to lower the interest rate charged on your debt; and (ii) to lower your monthly payment amount.
When you have multiple debts to different creditors and loans to pay at varying interest rates, debt consolidation is an option that allows you to combine them into one loan at a lower interest rate. Debt consolidation can be a good plan, particularly if your credit is decent enough to land a new loan and if your new consolidated monthly debt repayment amount won’t overwhelm your monthly after-tax income.
Getting that new loan
Applications for debt consolidation are not always accepted. It will depend on the lender you chose to work with and what their lending guidelines for debt consolidation are. Overall, make sure you are open and honest about where you are financially and what your goals for debt consolidation are during your loan meeting. Because the purpose of debt consolidation is to lower the cost of debts, any additional fees the lender may add on top are not helpful.
The most common type of debt consolidation loan is an unsecured loan. It can also be accomplished through a home equity loan or even transferring credit card balances from high-rate cards to a lower-rate credit card.
One of the goals of debt consolidation is to get the lowest interest rate possible applied to your debts. It is a simple, safe, and effective way for people with excess debt to responsibly pay off their debts without filing for bankruptcy.
How does debt consolidation affect my credit score?
While it can save you money, it might negatively impact your credit score at first. However, it will make managing your bills easier, as you will only have one bill to pay each month. This method is a powerful way to take control of your bills, pay off your debts sooner and simplify your payments.
Eventually, your credit score will improve because you are paying off your debt with each monthly payment. Every month your lender is reporting to the credit bureaus that you are making your payments on time and living up to your obligations. This is a much better position to be in than your debts overwhelming you and not being able to afford your monthly payments.
The side benefits
Debt consolidation can help you pay off what you owe faster and more conveniently, with one payment instead of many. This process may offer the relief you are looking for. Remembering to make each payment at the right time on all your debts can be taxing for some people. This makes the concept of such a program that much more appealing.
Choosing the right solution for consolidation is highly dependent on your unique financial situation. In most cases, if consolidation is the right option in your financial situation, then there shouldn’t be too many downsides to using the process in general. If you are overwhelmed by keeping up with multiple bills and loans, it will be able to help. Reviewing your current debts and total income will also help you determine exactly what your financial goals should be. It will also start to get you thinking about saving for your future also.
It is not the same as debt settlement
Consolidating your debts is not the same as a debt settlement negotiation. Consolidation reduces the number of financial institutions for your financial debts. Settlement will use an authorized credit counsellor to bargain with lenders in your place.
I have previously written about the dangers of using a debt settlement company. For example, you can read about it in my blog HOW DOES DEBT RELIEF WORK: APPARENTLY NOT GREAT 4 EVERYONE.
There is only one debt settlement program in Canada that is sanctioned by the federal government. It is called a consumer proposal and can only be administered by a licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee). To read all about how a consumer proposal works to avoid bankruptcy, read my blog WHAT IS A CONSUMER PROPOSAL? OUR INSOLVENCY FAQ PRIMER.
Filing for bankruptcy
The bankruptcy process varies based upon whether or not you have previously been bankrupt and if you do or don’t have surplus income. An important attribute of personal bankruptcy is that a freeze or automatic stay is placed on all collection actions against you. The automatic stay initially includes repossession. Although you have to be able to pay your expenses going forward, the basic needs for a living cannot be denied to you because of your bankruptcy.
Debt consolidation cannot secure you from collection actions. But, either a consumer proposal or bankruptcy does invoke that automatic stay. While bankruptcy will initially harm your credit score, it ultimately will discharge you from your financial obligations. This positions you in the most effective way to start rebuilding a good credit rating.
Just like in a consumer proposal, only a Trustee can administer a bankruptcy. In a bankruptcy, the Trustee will need to take possession of your assets, other than those that are exempt under provincial law.
To find out more about the bankruptcy process, check out our TOP 20 PERSONAL BANKRUPTCY FAQS.
Filing bankruptcy versus debt consolidation: Is it better to file bankruptcy or do debt consolidation?
It is of course always better to avoid bankruptcy. Figuring out which alternative is much better for you will ultimately rely on your unique scenario. So, you should meet with a Trustee for a no-cost consultation to get advice on all of your options, tailored specifically to your financial situation. Filing bankruptcy versus debt consolidation is a serious decision. It should only be made with the assistance of professional Trustee help.
I hope you found this Brandon’s Blog, filing bankruptcy versus debt consolidation, useful.
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