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Alternatives to Filing for Bankruptcy in Canada
July 27, 2018
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July 31, 2018
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Avoiding Bankruptcy in Canada: Debt Consolidation

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One of the strategies to avoiding bankruptcy in Canada is a debt consolidation loan. Here’s how they work and some information to help you decide if one is right for you.

Managing finances can be very stressful for a person in debt. Keeping track of payments, due dates, high interest rates, and balances owed to multiple creditors can be distressing for a lot of people. When overwhelmed by debt, many people make the difficult decision to file for bankruptcy.

Many Canadians hope to avoid bankruptcy, but don’t know which alternative would work best for them. Fortunately, there are many solutions available that allow you to recover from debt without filing for bankruptcy.

In part one and two of this series, we explored bankruptcy and some of its alternatives, respectively. In part three, we’ll take a closer look at debt consolidation and its role in the debt relief process.

What Is Debt Consolidation?

Debt consolidation is the process of combining multiple debts into one single debt. This is achieved by obtaining a loan, called a debt consolidation loan, to pay off your existing debt.

There are many advantages to debt consolidation loans, including:

  • One monthly payment — By consolidating your debt, you are essentially replacing your existing debts with the consolidation loan, which means only one monthly payment is required of you for the consolidation loan itself.
  • Lower monthly payment — Lenders will often agree to a longer repayment period with lower monthly payments. This option usually results in more interest being paid over the lifetime of the loan than if you repay it over a shorter period with a higher monthly payment.
  • Reduction in harassment from creditors — The phone calls, threats of legal action, and fears of having your wages garnished by creditors will stop.

Who Should Consider Debt Consolidation?

Debt consolidation is best suited for those who have stable income and fair credit. If you have poor credit, however, hope is not lost.

For those with poor credit, you may be able to obtain a debt consolidation loan by using your home, car, or other valuable asset as collateral. Be advised that you could potentially lose the asset(s) you provided as collateral if you fall behind on your payments.

What Kind of Debt Can I Consolidate?

While debt consolidation is one of the most common debt resolutions pursued by Canadians, not all debts are eligible for consolidation. Mortgages cannot be included in the debt consolidation process, for example.

If your debt was accumulated by one of the following, it is eligible for consolidation:

  • Credit cards
  • Utility bills
  • Consumer loans

The best way to determine if your debts are eligible to be consolidated is to contact a Licensed Insolvency Trustee (LIT). A LIT can assess your debt and help you to determine if debt consolidation is the right option for you.

Be wary when choosing a partner

There are many debt consolidation choices in Canada. Some of them are very helpful, but beware – some companies offering to help pay off debt or repair credit are misleading customers. How do you know which ones to look for? Here are a few red flags:

High pressure sales

If a debt consolidation employs aggressive tactics to get your business, they can create a lot of stress for you during a very difficult time.

Unrealistic promises

Some of the shadier debt consolidation companies make promises they can’t keep. Here’s a quick overview. Debt consolidation companies cannot:

  • Guarantee to reduce your debts by a large percentage
  • Guarantee that your creditors will always agree to participate in negotiations
  • Prevent creditors or collection agencies from garnishing your wages
  • Stop your creditors from trying to recover money from you in court
  • Stop phone calls from creditors
  • Offer legal protection from creditor’s actions such as seizing your assets
  • Handle government-regulated proceedings that release you from debt (only licensed insolvency trustees can do this).

Before you sign with any debt consolidation company, make sure you research the company’s reputation through the Better Business Bureau.

High fees

Make sure to comparison shop and beware of high upfront or advance fees.

Delayed payments

If the debt settlement company uses the tactic of intentionally delaying payments to your creditors in the hope of getting better results in negotiations to reduce your debts. That sounds like it should be a good idea, but in the end, it will hurt your credit score and make it look like you’re less able to pay your debts.

If debt consolidation sounds like the right option for you to avoid filing for bankruptcy, you should not delay in taking the next steps. Taking control of your situation sooner rather than later is almost always the right choice when managing a financial crisis.

However, if your situation is quite at this stage yet, and you’re looking for timely and manageable strategy for dealing with the occasional, temporary financial challenge, Pay2Day offers payday loans in Ontario. Find a retail store near you or apply online for a quick and manageable solution.

Read Part 1 of our series on bankruptcy in Canada here.

Read Part 2 of our series on bankruptcy in Canada here.