How Does A Debt Consolidation Program Work?
Unlike more drastic forms of debt relief like a consumer proposal or bankruptcy, a debt consolidation program is not a legal process. Instead of working with a lawyer or a Licensed Insolvency Trustee, you’ll work with a certified credit counsellor who will help you through the entire process.
The purpose of a debt consolidation program is to consolidate your eligible debts into a more manageable monthly payment. Generally, when entering a debt consolidation program you can expect:
Meeting The Credit Counsellor
Your main goal when meeting with your credit counsellor is to provide them with as much information about your finances as possible, the more information they have, the better they’ll be able to help you. Your credit counsellor will require information regarding your income, expenses and debts. So be sure to bring along your bank statements and other financial records. With it, your counsellor will:
- Figure out exactly how much debt you have
- Create a budget that covers all your debt, expenses, and income
- Negotiate with your creditors and come to an agreement on a monthly payment
- Provide you with the tools and knowledge to deal with any future financial issues
The Negotiation
The credit counsellor who you work with will negotiate, on your behalf, with your creditors and lenders in hopes of:
- Reducing your interest rates and/or eliminating any penalties you might incur or have already incurred.
- Extending the time required to pay off the debt (up to five years)
This way you can continue to afford all the necessities of your life while working toward your goal of being debt-free.
The Payment
If your creditors agree to your credit counsellor’s proposal, you’ll begin making payments. These payments are paid to your credit counsellor who will then distribute the payment to your creditors. Once you’ve completed the program, you’ll be debt-free, however, your credit will be negatively impacted for 2 years after you’re done with the program.
Reduce Your Monthly Debt Payments
Depending on your financial situation and how much debt you have, you could see a reduction in your monthly payments by as much as 50%. However, do remember that doesn’t mean they’ve eliminated the debt you owe but rather had it reduced by extending your payment term. Similarly, your credit counsellor may have been able to cut or reduce the interest you owe, meaning more of your money will be going toward paying off the principal rather than the interest that is accumulating.
A debt consolidation program, also known as a Debt Management Program (DMP), should not be confused with a debt consolidation loan. While a DMP is an informal proposal that is administered through a credit counsellor, a debt consolidation loan is simply a loan that you apply for with a lender to consolidate your debts.
Here are some of the key differences between a debt consolidation program and a debt consolidation loan.
| Debt Consolidation Program | Debt Consolidation Loan | |
| Process | Your credit counsellor will negotiate a debt consolidation plan with your creditors. | You must apply for a loan with a lender. |
| Legality | While your creditors are not legally bound to the contract, they agree to the proposal set by your credit counsellor. | You’ll be bound to your new loan. Any missed payments will affect your credit. |
| Interest | Depending on how your credit counsellor negotiated, you may or may not have to pay any extra interest on your balance. | Your lender will set an interest rate that you must pay to pay off the loan. |
| Eligibility Requirements | You do not require anything to enter a debt consolidation program. However, you must be able to afford the debt consolidation payments. | To qualify for a debt consolidation loan, your lender will have certain requirements regarding your credit score, income and debt level. |
What Types Of Debt Can Be Consolidated With A Debt Consolidation Program?
A debt consolidation program is a great option for many consumers who struggle to keep up with the cost of being in debt. With that being said, not all types of debt can be included.
Generally speaking, only unsecured debts can be consolidated such as credit card debt, personal loans, and unsecured lines of credit. However, in some cases, you may be able to add your secured debt.
- Credit Card Debt – Credit card debt is unsecured which means it is eligible to be included in a debt consolidation program. In fact, credit card debt is one of the most common reasons why consumers choose this form of debt relief.
- Unsecured Personal Loan Debt – Personal loans that are unsecured, meaning when you originally took out the loan you didn’t have to put up any form for collateral like a vehicle, can also be included in a debt consolidation program.
- Auto Repossession Debt – If your vehicle has been repossessed because you were unable to keep up with the payments, you may be able to include that debt.
- Non-Government Student Loan Debt – If you have private or non-government insured student loan debt that is causing you too much financial stress, entering a debt consolidation program might be a good option for you.
- Past-Due Cell Phone/Utility Bills – If you have a past-due cell phone or utility bill and you’re no longer using the same service, it’s possible that you can include that debt in a debt consolidation program
- Medical Bill Debt – Not all medical bills are eligible to be consolidated, but some are. If this is the main reason why you are considering a debt consolidation program, we recommend that you seek the advice of a credit counsellor first.
What Are The Benefits Of A Debt Consolidation Program?
A debt consolidation program is a great option for those who can’t afford to keep up with their monthly payments. It will allow you to work toward paying off your debts and regaining some control over your financial life. Let’s look at some of the benefits of joining a