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February 7, 2018

Consumer Proposal Vs Debt Consolidation

This time of year, there is a seeming endless barrage of advertisements related to debt.  “BURIED IN DEBT?” “DROWNING IN DEBT?!”  “DEBT RELIEF!”  I see the debt ads everywhere – Transit shelters, Billboards, Bus Wraps, Mailers. The timing suggests to me that many spend a little too freely over the holidays, and then the debt hangover kicks in some time in January when the resulting credit card bills arrive in the mailbox.

From my cursory examination, the majority of the advertising about “Overwhelming Debt” relates to bankruptcy or consumer proposals.  Nearly every ad is promoting an Insolvency Trustee.  Although Bankruptcy is often mentioned, it would appear that consumer proposals, particularly, seem to be the promoted outcome.

When I visit the websites of the various Trustees (or they call me seeking referrals) – inevitably I will see a discussion of the difference between Bankruptcy and Consumer Proposal.  Usually the discussion compares these two options, suggesting one is “easier” and often “better” in a given situation.  However, it never seems to be mentioned that there is a third option beyond Bankruptcy or Consumer Proposal – Debt Consolidation – that is perhaps the best option of all.

My own advertisements this time of year also focus on Debt, and outline the benefits of CONSOLIDATION.  Here, we take all your debts, take out a mortgage on your home, use the proceeds of the mortgage to pay off all your debts, and now you have a single, lower mortgage payment each month instead of a whole slew of smaller payments to the various credit card holders!

Why would you wish to consider this option?:

a) Lower Your Monthly Payments. Debt consolidation can DRAMATICALLY lower your monthly payments, to a fraction of what is currently being paid to multiple credit card companies.  In fact, in extreme cases where cash flow is very tight, I can set it up that there are no monthly payments at all!  By using private funds, we can set up the monthly payments with a debt consolidation to be pretty much anything you wish – so that they are totally manageable.

b) Lower Interest Rate. Debt consolidation converts regular credit card debt to lower risk SECURED debt.  Specifically, the unsecured credit card debt is converted to lower-interest secured debt by utilizing the equity in your home.  While there is some up-front cost to the transaction, nearly all of this cost comes from the proceeds of the new loan.  There is nearly NO up-front cost to you.  The difference in interest rate can be DRAMATIC; while credit cards often have interest charges of 20%+, a Debt Consolidation often has interest charges in the 7.99% range.

c) Dramatic improvement in your credit score. Unlike Consumer Proposal (and of course Bankruptcy) – a Debt Consolidation does not result in a “black mark” on your credit report.  And the reason is obvious … unlike Bankruptcy and Consumer Proposal, you are not making an arrangement to the credit card companies to pay only a portion of what you owe!  You therefore live up to the commitments that you signed when you obtained all the cards, so the credit card companies do not consider you to be defaulting … In fact, you paid in full!

d) Freedom.  I get lots of calls from people who are in the middle of a consumer proposal – and they WANT OUT.  It sounds great as is it being sold to you by the Trustee:  “Pay less than you owe.”  “Do not borrow.”  “Pain free.”  But the people who call me after entering proposal seem to be universally confused as to their credit situation while they are in the middle of the proposal.  It must not have been explained to them when they signed up – so they clue in after they are into it.

Until it is completely PAID OFF, and you are DISCHARGED, who will lend to you?  Certainly a bank won’t even look at you.  Nor a sub-prime lender.  And even a private lender will nearly certainly want the Consumer Proposal paid out as part of their private mortgage deal.  So you are STUCK grinding on that proposal until it ends  – often for 3-5 years, depending on how much the Proposal is.  Your life – at least your financial life – is on hold.

e) Returning to the bank. Nearly everyone who calls me in Consumer Proposal does not seem to know the conditions that are nearly certainly going to be required by a bank to do a mortgage or loan once you go the Consumer Proposal route. They are:

  • Completely pay off the Proposal;
  • Receive a Discharge for the Proposal;
  • Re-establish at least 2 revolving lines of credit;
  • Keep the 2 revolving lines of credit in good standing for 2 consecutive years, POST DISCHARGE.

So add all that up.  How much time from when you start the proposal until you have paid it all off, got your discharge, and re-established credit at least 2 years post discharge?  Five years?  Seven?  Lots can happen in 5-7 years ? No surprise I get calls from folks wanting to get on with their lives before they get to the end.

Obviously there are times where a debt consolidation will not work.  Perhaps you already have too much debt secured against the home – in the form of a mortgage, or a secured line of credit.  In cases such as this, there is insufficient equity to secure the new credit card debt.

Also – sometimes the debtor is not a homeowner at all.  In cases such as there, there is no way to secure debt against equity.

If for these reasons you cannot do a debt consolidation, then you may have no choice, and you may be stuck with a consumer proposal.  But you really owe it to yourself to at least consider the Debt Consolidation option, as it has so many benefits over Consumer Proposal.

If you wish to discuss your specific situation, contact me any time.

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