Debt Consolidation vs. Debt Settlement
I am often contacted by clients wanting to know the difference between Debt Consolidation and Debt Settlement/Debt Restructuring. In today’s column, we will explore the difference between the two:
Debt Consolidation can often be an excellent way for a person, carrying too much unsecured debt, i.e., credit cards, lines of credit, overdraft, bills, student loans, etc. to consolidate all of their debt into one comfortable monthly payment, usually at a much lower interest rate than the current debt. Instead of open, revolving debt, this loan is structured into one fixed payment over a specific period of time. This loan pays off all the existing debt and significantly alters cash flow in a positive way and allows for much easier budgeting on a monthly basis.
It is advisable, that once this loan is in place, all but one credit card is cancelled along with the lines of credit. It is also recommended that his person receives professional help with budgeting to avoid the trap of falling back into the same behavior patterns that created the problem in the first place.
To qualify for this type of loan, one must have excellent credit and the income to qualify to make the monthly payment, among other requirements. It is not unusual to have the bank ask for collateral (car, motorhome, second mortgage) to secure this debt. A co-signer may also be required.
If a person does not qualify for Debt Consolidation, then Debt Settlement may be an option to consider.
In Debt Settlement/Debt Restructuring, a Debt Consultant can structure an offer to settle all of the unsecured debt, through a Trustee in Bankruptcy, to reduce all of the debt into one low monthly payment, at zero percent interest. This offer can be as low as twenty cents on the dollar, depending on the person’s assets, income and liabilities. This offer is called a Consumer Proposal and is an alternative to Bankruptcy. A Consumer Proposal has a negative effect on the Credit Bureau whereas a Consolidation Loan does not. It is advisable that a person explore all of their options before deciding which option is best for them.
Any successful Debt Settlement/Debt Restructuring plan should always include a very comprehensive credit rebuilding program and ongoing budgeting advice so you do not become vulnerable for future financial challenges due to poor credit.
It is estimated that there are currently 1M Canadians with bad credit due to previous financial challenges and being provided solutions which does not include a credit rebuilding plan.
Author: Christopher Grew is a Debt Consultant serving families and businesses on Southern Vancouver Island.
