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Most people will have to tackle some form of debt in their lifetime. The key is to stay ahead of it by paying your bills on time. Nonetheless, it can be easy to take on too much debt to handle by traditional means, in which case you might need some professional help through a debt management solution.
Two of the most effective debt relief procedures in Canada are debt consolidation and bankruptcy. Want to know the benefits and drawbacks of these two debt solutions and, if necessary, which one would be right for you? Then check out this article.
If you have too much debt to pay off with your income or savings, one of the first solutions you could try is a debt consolidation loan or debt consolidation program. Some borrowers prefer these types of debt management procedures simply because they can be far less impactful on someone’s finances than declaring bankruptcy.
When discussing your debt relief options, it’s important to understand that there are two ways in which you can consolidate your debt.
You can borrow a debt consolidation loan from a bank, credit union or alternative lender. In most scenarios, the loan will be deposited directly into your bank account. You would then use the funds to cover your outstanding debts all at once, then repay the lender in divided installments (plus interest and fees) over several months (sometimes years with a larger loan).
You can enter a debt consolidation program through a credit counselling agency, which also involves paying down your debts via installments. However, you’ll instead give your payments to your credit counsellor, who will send them to your creditors on your behalf. The counsellor may even be able to negotiate a more affordable deal than you would have with a debt consolidation loan.
In either scenario, the goal is the same; to help you pay off your debts quickly and leave you with one payment plan to follow. Although you may have to cover your credit counsellor’s service price or loan costs, a single debt can be easier on your finances than multiple debts, rates, and fees.
Here’s an example to give you a better idea of how debt consolidation works:
So, instead….
Although a debt consolidation loan or program can be helpful under the right circumstances, either solution can have a significant impact on your finances and force you to take on a debt you’re not comfortable with. If that’s the case, don’t worry, there are a few less drastic ways to consolidate your debts, such as:
Declaring personal bankruptcy is a highly effective legal process that you can file for when you have at least $1,000 of debt. It clears all of your unsecured debts, often in exchange for the surrender of your assets to satisfy your creditors, allowing you to start over with a clean slate. The assets you do and don’t have to surrender may vary depending on what province or territory the process is being conducted within.
To file for personal bankruptcy, you’ll have to hire a Licensed Insolvency Trustee, who will guide you through the process and contract your debt sources on your behalf. These officers of the court are regulated by the federal government and work within the bounds of the Bankruptcy and Insolvency Act of Canada.
Once you’re deemed eligible for personal bankruptcy and the legal process begins, any debt collection penalties, including wage garnishment, lawsuits and mounting interest should cease and the whole ordeal will become a matter of public record. Soon after, you’ll be relieved of any unsecured debts that qualify for the procedure.
While debt consolidation is one of the less drastic debt management solutions that you can access in Canada, it’s important to weigh its pros and cons:
Despite personal bankruptcy being the most effective debt management procedure available in Canada, there are some major financial consequences that can follow:
It can be difficult to settle on one debt management solution when each has its own benefits and drawbacks. It really depends on your current financial situation. In the case of debt consolidation and bankruptcy, one makes your debts easier to manage, while the other relieves you of them altogether.
Before committing yourself to either of these debt management procedures, make sure to do a lot of research, get your situation assessed by a financial professional and look over the advantages and disadvantages listed above. Although debt consolidation and bankruptcy can be very effective, they may or may not actually be right for you.
Then a debt consolidation or bankruptcy might be the best option for you. That said, remember that the benefits and drawbacks of these debt management products can affect your finances positively and negatively. So, before you get started, speak to a Licensed Insolvency Trustee or debt counsellor to get some professional advice and a proper financial assessment.
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