Each day, many Albertans are faced with the challenging decision of how to repay debts. With interest rates and inflation rising, the number of cases is climbing.
When it comes to getting out of debt, many are surprised to learn there is more than one way to make it happen. You can find solutions to lighten the load and make the road to debt freedom more manageable.
Generally, there are two main options for those who need assistance – consumer proposals or debt consolidation, like a consolidation loan. Oftentimes, people get confused and feel frustrated trying to decide which one is best for them.
Let’s have a look at what each one is, who they are for, and when they are appropriate
A debt consolidation service generally offers a loan to cover your outstanding debts, essentially shifting all your various amounts owing into a lump payment owed to a single service provider. It’s important to know that sometimes they will not include all your debts but only the ones that you had with them. Your bank may not pay out a credit card held by another institution. Put plainly, debt consolidation can be a way to put all your debts into one big basket.
While this solution can protect you from some creditor calls, it basically shuffles you from one type of debt to another. Also, some debt consolidation services offer loans at interest rates rivaling those of credit cards.
Debt consolidation can work for people who have smaller amounts of debt (less than $10k), those who are likely able to pay it off through a more simply structured payment, or people who have a small-to-moderate amount of debt split between a high number of creditors.
Those with low-to-moderate levels of debt who are struggling with creditors and who have trouble managing multiple lines of debt would be best served by this type of solution.
BNA frequently advises clients that in many cases this option may merely push the problem away in the short-term and that it can add interest, making it a new form of debt payment to a different source. You cannot borrow your way out of debt without taking on more debt.
If you want to act and make a commitment to tackling your debt, BNA advises considering a consumer proposal.
For those who are financially overburdened, and who have limited capacity to repay the amount in full, a consumer proposal actively works to pay back your creditors at zero interest and zero additional fees. This legally binding document is put into place to provide Canadians with immediate protection from debt collectors and generally secures a partial or much-reduced repayment of your total unsecured debt. The repayment amount is negotiated by a Licensed Insolvency Trustee (LIT) like BNA and agreed upon by all affected creditors.
While creditors are keen to be repaid in full, they would rather recover some payment than no payment at all (which might be the case if the debtor declares bankruptcy). Under a consumer proposal, a LIT works out a mutually agreeable payment plan between you and your creditors. Not all your creditors have to agree to the proposal, just the majority by dollar value.
Typically, a consumer proposal is best suited for Albertans carrying larger amounts of unsecured debt and having trouble making interest payments or any payment at all.
Generally, when someone comes to BNA with debts over $10,000, we advise a consumer proposal because, at that point, it is likely they will need support and a plan of attack to pay the amount back and be protected. They will also need to take action to secure and build back a bank account in the future. Often, they will also need to rebuild their credit rating as well.
With a consumer proposal, creditors feel the debtor has made an honest commitment to repayment and the two sides can work together to come to a solution that is manageable and fair to both parties. The Licensed Insolvency Trustee works as the referee or negotiator to make this happen.
A consumer proposal is appropriate in almost all cases when someone is carrying a larger amount of debt ($10K or more) and find themselves incapable of managing repayment.
Merely talking about debt management can feel like a scary decision. But, once you rip the band-aid off and take even the smallest step toward debt management, what seemed like a mountain suddenly is on the path to resolution.
There are always options, and a LIT can walk you through which solution is right for you and how you can implement it. Taking action, making a commitment, and working through your debt problem is the best way to find financial stability and freedom. At BNA, we like to say that this is the last hard part before coming out the other side debt free.
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