How Does Debt Consolidation Work?
Racking up consumer debt is very easy to do. You may have done so without even noticing. A few charges here and there and bam! You’re hit with high interest rates that make it practically impossible to make a dent in that debt. You may have special circumstances that forced you into debt – illness, divorce, the unexpected death of a loved one, or even unexpected home or vehicle repair expenses. The problem is that while credit card debt is piled up, interest only grows. If you pay only the minimum amount due each month on any given credit card, you are very unlikely to ever pay it off fully. You may even feel so deep in the hole and discouraged about ever paying off your debt that you may consider bankruptcy. Before you give up, you should know that there are ways to work around your debt and get ahead despite those soaring interest rates. In these tough economic times, paying even just the minimum due on each of your credit card accounts can prove to be quite difficult. If you are looking for ways to reduce household costs or increase monthly income, consider how getting rid of your debt will affect your finances.
Debt Consolidation Loans. One proven way to improve your debt situation is to consider a debt consolidation loan. The most common form of debt consolidation consists of the following: – The ‘in-too-deep’ debtor applies for a debt consolidation loan. – The lending financial institution issues a new loan for an amount that is sufficient to pay all of the debtor’s outstanding debt. – The debtor uses the newly borrowed funds to make final, lump sum payments on all his outstanding debts.
Does it sound simple? That’s because it is! As long as you’re able to get approved, you should be able to simplify your life and improve your debt scenario. You may be wondering what the improvement is, since you are still in debt for roughly the same amount you owed. The advantage lies in the interest rate. Debt consolidation loans are likely to carry a much lower interest rate than those carried by your various credit cards and other types of debt. In addition to that, you’ll be simplifying your life by having just one substantial monthly payment to make rather than several smaller ones to keep track of.
Debt Consolidation Specialists. Another way of consolidating consumer debt is to employ the services of a debt consolidation specialist. The specialist will actually negotiate with the debtors various creditors. Usually these specialists have relationships with creditors and are able to leverage them to get the best possible outcomes for their clients. In addition to that, debt consolidation specialists are experts who know what the creditor will able to concede and will also have a good sense of what the debtor will be able to afford in terms of monthly payments. The debt consolidation specialist will work as an intermediary between the debtor and creditor until a feasible and mutually acceptable plan is outlined. Debt consolidation professionals will not intentionally make arrangements that will put a debtor in a position to fail.
There is Help If you are feeling buried by debt and discouraged about ever finding your way out, remember that there are resources available to you. Canadian debt consolidation can help financial obligations seem more manageable and can also help to improve your credit score. Before signing up for anything, make sure to review all the options. Try to get references or look for customer testimonials about any service you consider using.
Amy Nutt is a freelance writer who writes on a variety of financial topics including personal budgeting and debt consolidation. For more information about personal finance and credit counselling, ConsolidatedCredit.ca is a tremendous resource on the topic for Canadians.
Debt Consolidation FAQ:
Question: I have about $5000 in debt and its all starting to catch up. My credit sucks, how can I get out of this mess?
I live in Canada and have tried to get a debt consolidation loan but because my credit sucks I am not approved. Any other ideas?
Answer: If you have several credit cards, I suggest you pay the minimum on each card except for one. On the one card make the highest payments each month that you can until you have paid it off. Once you are done with that one concentrate on the next one also making high payments while paying the minimum on the others until you are done.
Question: Separation, Bankruptcy and Credit Card Debt?
My husband of 29 years recently walked out on me and our three girls. I’ve been awarded spousal support and child support through the courts. $400 spousal, and 500.00 Child support. Ever since he left, I have fallen behind on all of my bills, but mostly my two Credit cards which are solely in my name. These are in my name because he had a business bankruptcy about five years ago, and was not able to obtain any credit. These cards are both maxed out to a total of nearly ten thousand dollars, and the phone calls have just begun. I try my best to keep my payments up, but I’m not even meeting the minimum.
Answer: Look to the government for some support, you’re likely able to qualify for food stamps / financial assistance at this point. Call your creditors back and ask for hardship assistance. Tell them that you want to pay the bills off, but at this point if they can’t be flexible then you’re thinking of bankruptcy. That will get some wheels turning a bit more. Don’t be afraid to ask for a supervisor if you don’t get what you want, this is your future on the line.
Question: Consolidation/Bankruptcy?
I am $97000 in debt and I am thinking of consolidation or bankruptcy (in BC, Canada). Every couple of months I get an application from MBNA for their consolidation loan which I am thinking of applying for. But what I am scared of is, if I do take this consolidation loan, and for some reason I can’t pay monthly payments and therefore I decide to declare bankruptcy, will I be able to do so?
Answer: Opt for a debt consolidation loan: The easiest method of getting a debt consolidation loan is to utilize the equity of your home. Equity of your home is calculated and determined by the difference in the amount you have paid and the amount you owe. If the amount you have paid is more than the amount due, you can use it as collateral. This allows you to borrow money on lower interest rates. Besides, you also get tax benefit on this type of loan. Consult your tax advisor before opting for this loan.
Question: Bad credit loans?
Does anyone know of a company in Canada that will give personal or debt consolidation loans to people with bad credit?
I have a visa in collections, which is the only credit I had. I don’t have any assets and nobody will give me a chance. I have a good paying job now and only want to borrow 6000$. I also don’t have a co-signer. Any ideas?
Answer: 1. Use that good paying job to pay off the collection.
2. Save the money that you were planning to borrow.
3. Get a saving secured credit card to rebuild your credit reputation.
When the only credit you had went to collections is it any wonder no one will lend you money? It may sound harsh but it is the truth.
Question: Credit/Collections steps?
My credit cards are maxed out and I have been unable to make the minimum payments (or any payments) for a while now. I am with Royal Bank of Canada, if that makes any difference. After collections, they can garnish my wages, correct?
What are the steps that happen in order and how long does it usually take before I am officially screwed (ie, will I get sued? 7 years no credit?). Apparently I do not qualify for debt consolidation. Not sure what my options are, as my minimum payment for my credit debt (550) is almost as much as my rent (769).
Answer: Not sure what the laws in Canada are but in the US it is this. (1) They will cut off your credit and turn it over to collections (2) If it is a large sum for one company they can take it to court (3) If they take it to court the judge can garnish your wages for up to 75%. They can also take everything you own and sell it for payment.
Some credit repair places, the legal ones, can stop the interest and set up a payment plan. You will pay by this plan because your income check will be direct deposit and the money withdrawn from your account. A freeze will be placed on your bank account for the monthly amount of the payment. Your rent, food etc is of no concern for them.
Needless to say, your credit is shot for 7-10 years AFTER the last payment to the last company. You might be lucky and they will just write it off
That is the bad side. Talk to the credit repair folks, get a legal one and not a fly by night group, and they can help.
Question: Avoid bankruptcy in Canada?
My husband has debt of over $60,000 and he is thinking of bankruptcy. My question is; my husband has been avoiding calls for two and a half years, what is the best option now bankruptcy or consolidation? At this time my husband doesn’t have a job and we have a family of 5. If he consolidates how much of the loan will be written off?
Answer: Avoiding phone calls for that long constitutes fraud. Expecting companies to charge off the interest is ludicrous. You need to become responsible. He should have been telling those he owes as to why he’s not paying the bills. Your husband needs to get working. If your children are out of the diaper stage then you too need to be working. Just think, the more kids you have the more trouble you will get into. In the USA there is a group set up by the government called Consumer Credit Counseling. Find out what the equivalent there is in Canada and have him set an appointment with them for consolidation. In the meantime stop spending.
Question: Collection agency saying I owe but I’ve paid everything Help!?
My husband received a letter today from Financial Debt Recovery claiming that he owes $6200+. We took out a consolidation loan a year or two ago and paid off all bad debts. I also work for a bank and was able to obtain our credit reports. According to the bank we both have clean slates. I sent a request through to TransUnion Canada for my husband’s full credit report and there are a couple items on there from years ago that were written off – but don’t add up to anywhere near 6000. This law firm and Financial Debt Recovery are legitimate businesses. What’s going on here?
Answer: Did you get a written settlement agreement when you originally paid off the bad debts? Collection agencies are notorious for agreeing to settlements over the phone then denying that any settlement was made once they get your “settlement” money. They usually resell the debt to another collection agency, which inflates the amount due and starts the whole collection process all over again.
Debt collection laws in Canada are handled by provincial laws, rather than one national standard law as we have here in the USA. Send them a letter via Certified Mail + Return Receipt (NOT regular mail) stating:
I am requesting written validation of this alleged debt, which includes:
- a copy of the original signed contract with my signature
- a fully itemized statement showing how the amount you are asking was calculated.
Question: What are the disadvantages of getting Debt consolidation?
I know the advantages of it but I want to know the risk too of it.
Answer: Cons:
Get Into More Debt. It may be tempting to continue to use the credit cards that you’ve paid off. This is one of the reasons why debt consolidation is not a cure for credit problems. In fact, it could actually make problems worse, by allowing a person to get into more debt than they started with.
May Cost More Overall. Even though the monthly payments and interest rate might be lower, you can end up with a longer-term loan in which you end up paying more interest in the long run.
May Take Longer to Pay Off. If you don’t end up using the extra monthly savings to pay off your loan (and perhaps even if you do), it could take you longer to get out of debt.
Could Lose Your Home. If you go the route of a home equity loan, the lower interest rate that comes from listing your home as security might not be that beneficial if you default on your loan and lose your home.
One Payment. In some cases, it can be beneficial to pay off smaller loans with higher-interest rates first. You don’t have that option if you’ve lumped all your debt into a single loan.
May not Qualify for a Loan. It’s possible that with so much debt, you may not qualify for an additional loan. Or, if you do qualify, the interest rate might be high.
Disreputable Debt Consolidation Companies. Not all non-profit debt consolidation services are looking out for your best interests. Some companies may be downright scams.