There is nothing more amazing than the feeling of breaking free from consumer debt. The liberation that follows debt relief can be truly transformational. Life feels easier and lighter when your budget is balanced and you’re no longer going backwards financially. I can speak of this from personal experience; at one point in my life I was in an overwhelming amount of debt from a failed business. The stress from the debt was indescribable and it had a negative effect on every area of my life including my family and health. After some research into my options for debt consolidation I came across 4 Pillars consulting and met with their local consultant who helped me reduce my debt and get my finances under control. It was like waking up in a safe happy place after having a bad nightmare. There are no words that can describe how amazing it felt to reach the point where my debt was paid off, I could live off of my own income and start putting money into savings instead of throwing it at debt interest. After this positive life changing experience of working with 4 Pillars, I naturally wanted to work in this field, so I could help as many other struggling families achieve debt freedom, so I joined the team in 2010 and the rest is history. 

Now that I have shared a bit of my own story, let me now share with you the 5 best ways to consolidate your debt so that anyone feeling trapped in a quagmire of debt can explore their options and find the right path for their situation.

Debt relief/consolidation options are not a ‘one size fits all’ type service, and each option has an advantage and disadvantage that may or may not be a good fit. The words “Debt Consolidation” creates a lot of confusion as it is a very general/vague term and can refer to a lot of very different services and options for dealing with debt. The word consolidate in its simplest form means “to put together.” Therefore, any plan that puts all of your debt from multiple sources and multiple types of debt (credit card, store card, overdraft, etc.) together into one single payment, could be called “Debt Consolidation”.

To illustrate these methods, I will use an example where a debtor (a person in debt) has a debt load of $40,000 on credit cards and lines of credit etc. Their monthly payment is $700 per month.

COST OF DOING NOTHING: The cost of not dealing with one’s debt and just paying the minimum required payments over time results in a very large amount of money wasted on interest.  In this example, if a person pays their minimum payments for 5 years and then receives a windfall and pays off their debt, this is the total cost:

In this example of $40,000 owing on debt, the COST OF DOING NOTHING = $82,000*

*Cost of doing nothing = $700/month (minimum payment is only interest) x 5 Years = $42,000 wasted on interest over 5 years, plus the original amount is still owing so add $40,000. If a person carried their minimums for 5 years and then received an windfall (inheritance etc) and paid off their debt at once, the total cost would still be $82,000 since you need to include the cost of carrying the debt plus the amount you have to pay off.

How is that for a big waste of money? As you can see that the cost of doing nothing it is obviously a very bad/expensive plan! Everyone who is only paying their minimum payments or is finding that their debt balances are staying the same (or getting higher) year over year, desperately needs to look into debt consolidation.

To properly illustrate all consolidation methods, I will compare the average payback (what % of the debt owing will the person in debt pay back which is the inverse of average savings), the total saved when compared to doing nothing, and the estimated monthly payment, and will compare them all on a 5 Year payback timeline. The timeline for payback can of course be shortened by simply increasing any of the payments with any of these 5 options. I did not include the option of using mortgages or home lines of credit to pay off debt for this exercise in order to be relevant to anyone whether they own a house or not.  

Using this example of $40,000 of debt owing, here are the 5 best ways to consolidate your debt:

1. Bank Consolidation Loan

• Payback – 125% (at 9% interest)
• Payback – $49,800
• Savings –  $32,200 (compared to doing nothing over 5 years)
• Payment – $830/month

The advantage of getting a bank loan to consolidate your debt is that it makes one simple equal monthly payment. The payment is both interest and principal, so it is forcing you out of debt every month you pay it which is a really good thing. It is good for your credit since you are paying back all of your debt so long as you make all the monthly payments on time. However, the downside is these loans can be hard to get, they can be more expensive than your current debt payments and the banks can be picky about what debts they are willing to include in these loans (they generally will not consolidate Revenue Canada debt for example). If you find yourself in a difficult situation after taking the loan (like divorce) then the loan can turn against you as the payments cannot be missed without consequences. In this example, the persons monthly payment went up in cost, and I find this is quite common with unsecured debt consolidation loans. Another big problem is that lenders (banks or other) will often ask for a co-signer which means they don’t think you should qualify on your own. This means bringing family or friends into the situation and putting them at risk. If you default on the loan due to sickness or any circumstance, the bank will collect off your friend or family member that co-signed.  This is never fun and often puts strain on relationships. If you are using this option, I would recommend that you cut up or close off all your credit cards except one small one. This is so that there is no possibility of reaccumulating credit card debt while paying off the consolidation loan as this could make a debt situation much worse.

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2. Line of Credit

• Payback  – Infinite % (if the borrower continues to pay only the minimum payment)
• Payback –  Infinite (unless borrower pays more than the minimum monthly and does not reborrow)
• Savings –  $0 (unless borrower pays more than the minimum monthly and does not reborrow)
• Payment – $830/month

A line of Credit is a loan that has no fixed principal payment and can be used to consolidate debt if the borrower chose to pay off all their debt with it and not reaccumulate debt on the cards that are cleared off from the payout. The advantage is the payments are lower because the payment on a Line of Credit is usually interest on, but the disadvantages are many. People can remain stuck in debt forever if they fail to work down the principal voluntarily (it’s not easy).  It’s tempting to continue to reborrow off a line of credit and once a person’s credit cards are all paid off, it can be challenging to avoid using them and reaccumulating debt on the cards. It takes incredible financial discipline to effectively use a line of credit to become debt free.  I personally do not recommend this since I have seen this consistently fail for people. If you are trying to decide on getting a Consolidation loan or a Line of Credit, please read a more detailed article on the advantages and disadvantages of these 2 options by reading here.

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3. Credit Counselling

(For Profit and Non-Profit) aka Debt Management Plan:

• Payback  – 105 % (you pay back MORE than you owe generally due to fees)
• Payback – $42,000+ (even the non-profits have fees and the payback is 100% plus varying fees)
• Savings –  $40,000 (you pay back all of the debt, but at a lower interest, usually no savings on principal)
• Payment – $775/month* (estimate – we are not credit counselling, so we cannot accurately quote their program – we are using estimates based on our research and investigative calls)

Credit Counselling (or similarly Orderly Payment of Debts or Debt management Plans) is a program that consolidates debt into one payment by way of a new agreement with the lenders. The advantage of these options are they reduce the interest rate on your debt. The disadvantage is: it’s a full payback program which means you pay back all of the debt you owe, and it hurts your credit. These programs generally offer no savings off the principal amount owing, and the payments can cost more money per month than your current payment before entering credit counselling. We find this program to be disappointing as it hurts a consumer’s credit without the advantage of any savings off the principal debt owing. Learn more about the different impacts on credit here. Another disadvantage of credit counselling is that these programs typically cannot include tax debt owing whereas the options 4 an 5 below can.

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4. Consumer Proposal

(filed with a LIT) (*HINT- This is one of the fastest and most effective ways out of debt)

• Payback – 30 % (you pay back LESS than you owe due to a new agreement)
• Payback – 12,000 (most of the principal is forgiven, all you have left is a small balance to pay)
• Savings –  $70,000 (cost of doing nothing $82,000 compared to payback of only $12,000 at 0% interest)
• Payment – $200/month* (estimate – based on typical client settlement with creditors)

A Consumer Proposal with an “Aftercare” plan is, in my opinion, one of the most aggressive and effective methods of both Consolidating and Reducing your debt. It usually reduces the principal of the debt, reduces the monthly payments, reduces the interest to 0%, and drastically reduces the time it takes the average debtor to get out of debt. A Consumer Proposal is officially filed with a Licenced Insolvency Trustee (LIT) who has statutory duties to both the debtor and the creditors and receives increasing compensation the higher the proposal. 4 Pillars on the other hand advocates and represents the interest of the debtor (person in debt) to help them get the lowest possible settlement so that the client saves the most money possible. 4 Pillars also focuses on Aftercare which helps ensure consumers have the best chance of future financial success.

A consumer proposal effectively turns your expensive credit card (and almost any other debt) into a very affordable single 0% percent interest payment plan that can help you completely revive your financial life. It can effectively eliminate almost any type of debt even Taxes owing to Canada Revenue Agency.  There is only one main downside with a proposal vs a consolidation loan from a bank and that is, it will reduce your credit score temporarily. But fear not, because for clients that work with us at 4 Pillars, we offer a full comprehensive credit rebuilding plan called ‘Aftercare’ that will have you back into good credit in the shortest amount of time possible.

Our services include working with you in preparation of proposal plan that fits your budget and preparing for signing with the trustee.  We will provide support and guidance through the entire process and signing of your proposal with the LIT.  This includes, representation helping you get the best and lowest settlement possible in your consumer proposal and supporting you to ensure your proposal is ultimately successful.  You will receive training on how to budget and how to stay out of debt, comprehensive credit rebuilding plan and ongoing assistance with anything relating to the rebuilding your financial situation, post proposal. ‘Aftercare’ is one of the many things that sets 4 Pillars apart from the rest and why someone might want to work with 4 Pillars. With our complete financial rehabilitation program (Aftercare), you will be back on your feet financially and have good credit in what will feel like no time. This will be incredibly fast compared to the time it would take you to pay off your credit cards by making only the minimum payments. Contact us for a free assessment on a customized consumer proposal plan (with aftercare) for your exact situation.  

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5. Bankruptcy:

• Payback – 20 %? (Bankruptcy varies massively with income & assets, so we are estimating an example)
• Payback– 10,500 (payback varies with income and windfalls, so we are estimating an example)
• Savings – $71,500 (cost of doing nothing $82,000 compared to payback of ex $10,500 at 0% interest)
• Payment – $500/month* (estimate – based on average client income)

Bankruptcy is also in a way debt consolidation as it puts all a person’s debt into one payment. In my opinion though, Bankruptcy is the very last option and can be the most damaging way out of debt. The benefits including quick payoff and low payback, but the disadvantages are numerous. Besides possibly losing all your non-exempt assets (like your home equity and vehicles), I have witnessed that Bankruptcy has damaging emotional effects. Although not warranted, I often see people that go Bankrupt struggle with guilt, shame, frustration and depression that seem to build up because of the difficulty of going through this overwhelming process.

The consequences of Bankruptcy are difficult to calculate at the beginning because there are some long-term consequences that many people downplay or aren’t even aware of. For example:  If you have been bankrupt, even if it is 8 years later when it has fallen off your credit, there is no end to the timeline that you need to disclose your bankruptcy when applying for a loan (if the loan application asks). I have noticed that on most bank loan applications as well as applications for insurance there is a question worded like this; “have you ever been bankrupt”. Even though the negative effects do eventually fall off of a Bankrupt person’s credit report, the long-term damage can be permanent. Another negative to consider is it may not be possible to sponsor a loved one to Canada for citizenship if you are yourself still in Bankruptcy. The most severe, and it can have the most long-lasting effects, include asset loss and it may even effect some of your career options. A problem that I also observe very often is the lack of change that Bankruptcy brings. I have seen statistics showing that Bankruptcy’s repeat at an alarming rate, whereas Proposals do not repeat at the same rate* (*this conclusion was reached by interviewing local Bankruptcy professionals). I do not recommend Bankruptcy for anyone unless all other options above have been explored and considered and are not reasonable or affordable for some reason.

A Bankruptcy is also filed by a LIT (Licenced Insolvency Trustee) and only a LIT can accept the payments for bankruptcy to be distributed to the creditors. One thing to consider is that the LIT has a duty to the creditors (duty to act in a way to benefit the creditors). Since Bankruptcy payment and loss of assets is a formula, one might conclude the payments in Bankruptcy would be consistent wherever you go, but they are not. The Bankruptcy payments you might have to make, and the assets you may lose or not lose, can vary drastically. This is because there are many varying interpretations of the Bankruptcy Act itself which influences a client’s payment. If you feel like your only option is bankruptcy you can choose to work with 4 Pillars to be your advocate and to help you understand the process and navigate the complexities and to have help with repairing your credit more quickly afterward to ensure the least amount of long-term damage. Here is some more information on Bankruptcy.

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Summary

As you can see there are a lot of differences between these options for dealing with and consolidating one’s debt, and the best option for one person will not be the best option for the next person. There are no easy answers here and no once size fits all. Each option has its advantages and disadvantages and will impact everyone differently, so it is important to explore how your exact debt situation fits into each of these options and what each one will cost or save you.

At 4 Pillars, we work only for the person in debt and this sets us apart in an industry full of players who get paid more to collect more and essentially work for the benefit of the creditors (banks etc). 4 Pillars  acts as your advocate to push to get you the absolute cheapest settlement that saves you the most money. We also are one of the only companies in Canada that is offering debtors an “Aftercare” program which includes helping people recover their credit score shortly after dealing with their debt and helping people never get into debt again by providing customized financial education.

A recent industry Canada report showed that insolvency’s (Bankruptcy’s or Proposals) repeat at a rate of 20% whereas which is alarming. 4 Pillars clients only show a less than 3% repeat rate. By working with 4 Pillars you have your own advocate and your best chance of total financial rehabilitation and success.

If you are considering one of these options, please give us a call for a free consultation. We will review ALL the options for you and show you the full advantages and disadvantages of every option as well as the cost/savings. We are a specialty financial firm that offers exclusive advice on how to best reduce your debt and rebuild your credit. We work for YOU and not the Banks, and we care deeply about your total financial success.  

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 *Disclaimer – all these calculations are estimates and we cannot guarantee their accuracy, they are done for education and explanatory purposes, we assume no responsibility for any inaccuracies. Any ideas expressed in this article is our opinion only. These are examples based on our best understanding of each program and there will be wide variance depending on many factors. To find out specifically what your payment might be we encourage you to check out every option and get a proper quote on every option and consider all the pros and cons of each option before making any final decision. 4 Pillars is not a Licenced Insolvency Trustee (LIT) firm and has a different purpose and focus and service.