David Sklar & Associates Inc.

Consumer Proposal & Bankruptcy Trustees
Serving the Greater Toronto Area

Debt Consolidation – Your Options

Many of our Greater Toronto Area clients express confusion over the term Debt Consolidation. This is understandable, since the same phrase is used to describe a number of different debt solutions.

Basically, Debt Consolidation combines outstanding, unsecured debts (such as credit cards) into one monthly payment that is less than the amount of total payments before consolidation.

There are three main types of Debt Consolidation: Loans, Informal Agreements, and Proposals.

Debt Consolidation – Loans

For individuals who qualify for a loan – a Debt Consolidation Loan is usually taken out at a bank, credit union or a loan institution. It is most often used to pay down credit cards and outstanding consumer debt and is usually at a lower interest rate than the original debts. Often, this type of loan is taken out as a home equity loan.

For some people, this can be an effective way to get control over their debts and it teaches them to better manage their credit in the future.

Unfortunately, for others – it becomes a spiral into greater and greater debt. Instead of cutting up their credit cards and paying off the Consolidation loan, they continue to overuse their credit and find themselves back in serious debt. They then get another Consolidation loan, falling deeper and deeper into debt.

It is important to understand that if a Debt Consolidation Loan is in the form of a home equity loan or is secured against other assets – the loan cannot be included in a Bankruptcy or in a Consumer/Division Proposal. The more severe you debt situation is, the more important it is to speak with Licensed Debt Professionals™ before taking out a secured Debt Consolidation Loan.

Debt Consolidation – Informal Agreement (Debt Management Plan)

For people who earn enough to pay off 100% of their debts – but cannot manage paying off both their unsecured debt and unsecured interest - Informal Agreements or Debt Management Plans may be a good option.

Working with a credit counsellor, the unsecured creditors are approached to take part in an informal agreement, where the debtor pays back the balance owing and ongoing interest charges are reduced (sometimes to 0%). Note: Student Loans and Canada Revenue Agency debt will not normally be included.

People in this type of plan make their monthly payment to the credit counsellor’s company, which then disperses the funds to the creditors.

For people who qualify for this type of arrangement – this can be an excellent way to pay off as much debt as possible and reduce the damage to their credit ratings.

For those individuals whose salaries or bank accounts have already been garnisheed, or are facing court action over their debts – Informal Agreements cannot force a garnishee removal or stop court proceedings. Nor can an Informal Agreement stop the collection efforts of creditors who do not want to be part of the Agreement.

Debt Consolidation – Consumer Proposal

People who cannot pay back all of their debt and are insolvent, may qualify for a Consumer Proposal or a Division I Proposal. A Division I Proposal is for those individuals who owe over $250,000 (does not include mortgage on prime residence).

Proposals are formal, legally binding Debt Consolidation agreements that require the services of a Bankruptcy Trustee (licensed by the Federal government).

Based on what an insolvent person can reasonably repay, a Proposal is written up and submitted by the Trustee to the creditors. If a majority of creditors accept the Proposal, it becomes a legally binding agreement on all of the unsecured creditors. Proposals can result in a substantial reduction of the total amount of outstanding debt.

Once a Proposal is accepted by the majority of creditors, all unsecured creditors must honour the agreement, debt collection efforts must stop, and garnishees must be removed.

Note: In some situations, Student Loans can be included in a Proposal. Canada Revenue Agency debt, in many situations, may also be included. Both of these types of debt are unique – and require discussion with a Trustee.

Your Best Debt Consolidation Option

Finding the Consolidation process that is best for your needs can be a challenge.

If you live in the Greater Toronto Area, we recommend you take advantage of our free, no-obligation consultation with the Licensed Debt Professionals™ at David Sklar and Associates. We will review your current financial situation and explore all of your debt-removal options with you – even the ones that do not involve our services.