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What is debt consolidation?

Debt consolidation is a financial operation that involves borrowing a single amount from a financial institution to pay off most or all of your debts, and then repaying a single creditor. This debt-relief solution covers credit card balances, lines of credit, overdrafts and consumer goods loans, but does not include secured loans (car loans and mortgages).

Consolidating your debts allows you to reduce interest rates without really changing the total amount you have to pay, which makes it easier to manage your payments, since you only have to make one monthly payment rather than several on a single date. This solution guarantees better financial management over a five-year period.

However, consolidating your debts remains a last resort and is subject to certain requirements:

• Stable income that guarantees your ability to repay your debt on a monthly basis.
• A good credit rating without too many late payments or credit accounts in collection.
• A debt ratio of less than 40%.
• A guarantee is usually required, and unsecured loans are usually for lower amounts.
• Having assets works in your favor.

Steps in the debt consolidation process

1. Meeting with an authorized insolvency trustee (IAS)

This is a key step in the process of obtaining a professional assessment of your financial situation. A meeting with an insolvency trustee allows you to analyze the various financial solutions available to you and guide you towards the best option. With Groupe Serpone, you benefit from a free initial consultation.

2. Drawing up a new budget

Once you've compiled your list of creditors, it's time to calculate your debt-to-income ratio and determine how much you'll need to borrow to pay off all your debts. This is an important step in defining the new monthly repayment and checking your eligibility for debt consolidation. The next step is to draw up a new budget (loan payments, lifestyle, bills, etc.) to determine whether you can meet the monthly repayments.

3. Choosing a financial institution

Your insolvency trustee will find a financial institution willing to grant you a consolidation loan. Several parameters will be taken into consideration, including your credit rating and the stability of your income, in order to determine whether debt consolidation will be refused or accepted.

4. Payment of creditors with the consolidation loan obtained

If the loan is approved, it will be used to pay off your creditors and get you out of debt. From this point on, you'll have just one creditor and just one payment to make each month.

5. Repayment of consolidation loan

Now it's your turn to repay the financial institution that granted you the loan under the new terms. You'll have to make a new monthly payment, at a lower interest rate, over a period of up to five years. Once these steps have been completed, you'll finally be debt-free.

The advantages of debt consolidation

There are a number of advantages to debt consolidation:

• Better and simpler financial management, because you only have to pay one amount at the end of the month.
• Lower interest rates and the chance to save money over the long term.
• A good credit rating is preserved if you pay on time.
• Applying for debt consolidation is free.
• Repay most or all of your debts within 5 years.
• The possibility of using your assets to obtain better interest rates.

How can you consolidate your debts?

There are various ways to consolidate your debts, depending on your financial situation and the types of debt you have!

1. Debt consolidation with credit cards

This is a balance transfer in which your old credit cards are replaced by new cards with a lower interest rate. You can benefit from a low introductory rate for a period defined by the bank in question. A good credit rating and stable income are generally required. However, once the period is over, interest rates may rise and you may find yourself back at square one.

2. Debt consolidation with a personal loan

This method depends on your income and credit rating. Interest rates on unsecured loans are still very high compared with secured loans. You must have a low debt-to-income ratio to be approved for this loan.

3. Loan secured by personal assets

When your debt-to-income ratio is very high, you can take out a secured debt consolidation loan. This involves using one or more of your valuable assets, such as valuables, a vehicle, collectibles, jewelry or paintings, as collateral. This type of loan can also involve high interest rates.

4. Debt consolidation with a second mortgage or refinancing

If you're a homeowner, you can consolidate your debts by opting for refinancing or a home equity line of credit. This method is more risky. Reverse mortgages are also available to Canadian homeowners aged 55 or over. The parameters taken into consideration by this type of loan are the equity in your property, your age and the location of your home. You can access this solution even if you have low income and a poor credit rating.

Is debt consolidation right for you?

If you have a lot of debt that has become unmanageable over time, but you have a stable income and a previously well-maintained credit rating, then debt consolidation is a viable option. However, you should always bear in mind that this operation excludes mortgages and generally requires collateral such as the equity in your home or car in order to obtain a loan.

Debt consolidation requires discipline, as late payments are very much frowned upon... not to mention the risk of getting further into debt if you keep your credit cards). So it's important to pay off the new loan on time and avoid taking on new debts that could damage your credit rating and hamper your financial management.

Be aware that you run the risk of being turned down if you have too high a debt ratio, an unstable job, a history of late payments or no collateral. If this is your case, there are other alternatives to consider, such as a consumer proposal, which is a negotiation between your authorized insolvency trustee and your creditors. This is a solution provided for in the Bankruptcy and Insolvency Act, and it also has a number of advantages:

• A single monthly payment to your property manager.
• Reduce the total amount of your debts, unlike debt consolidation, which does not change the amount you have to pay.
• No interest.
• Protection against the risk of wage or property garnishment
• Protecting your job
• Repayment can be spread over 5 years.

The proposal can reduce your debts by up to 70%, but must also meet certain criteria:

• Your total debts do not exceed $250,000
• The minimum debt is $1,000
• Financial problems
• Reside or own property in Canada

It's important to note that, unlike debt consolidation, a consumer proposal appears in your credit file. And this notation will remain until the end of the proposal, or even for years afterwards. What's more, if you don't respect your commitments and fall behind on three payments, the proposal is cancelled and your creditors can demand repayment again on any terms they wish. At this point, it's important to know what to do ifthe consumer proposal is cancelled.

Before starting any procedure, always make sure that the interest rate and payment period suit your lifestyle. Once you've determined your budget, you need to keep your goals in mind and remain disciplined. If these two alternatives don't suit your financial situation, you can consider personal bankruptcy. This is a legal procedure designed to make a debtor pay his debts by selling his assets.

To make sure you make the right decision, we advise you to proceed step by step:

• Calculate your total debts with their interest rates.
• Draw up a new budget and review your daily expenses.
• Try renegotiating your debts.
• Improve your credit rating
• Check whether you have valuable assets for sale that can help you reduce your debts
• Debt consolidation
• Making a consumer proposal
• Filing for personal bankruptcy

Groupe Serpone is at your disposal to guide you through the entire process and, above all, to help you make the right decisions and better manage your finances. Our firm of accredited bankruptcy and insolvency trustees is at your service. Our experts will help you find the best solution for your needs and financial difficulties. We specialize in debt consolidation, consumer proposals and personal and commercial bankruptcies. Don't hesitate to contact us for a free consultation!

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