May 28, 2021 | By: Randolph Taylor

Understanding Your Debt Consolidation Options

Debt Consolidation | Debt Consolidation Programs | Debt Consolidation Loan

Debt is a brutal reality for millions of Canadians. There are many reasons why someone might fall into a spiral of out-of-control debt—such as job loss, divorce, health issues, loss of a loved one, or plain old bad luck. Regardless of the situation, it’s only natural for people in debt (sometimes with bad credit, too) to look for ways to get out of debt, and debt consolidation can be an effective choice for debt relief.

So, many people look for “debt consolidation companies” online.

There are a few different ways that debt consolidation works. For example, some people might take a loan from their bank to roll all of their debts into a single loan. This is called a debt consolidation loan.

However, one of the best options for debt consolidation is a Debt Consolidation Program, or DCP. What is a DCP? Why is it one of the best debt consolidation options for Canadians?

I went over these (and other) questions in a recent interview on the Moolala podcast and summarized the main takeaways below.

What Is a Debt Consolidation Program?

A DCP is an arrangement where a non-profit credit counselling agency works with an individual’s creditors to either stop or significantly reduce the interest on their unsecured debts. Then, they roll all of the debts included in the DCP into a single manageable monthly payment.

This is considered one of the best debt consolidation options for those struggling with debt payments since it provides a clear path to eliminating unsecured debt and stops it from growing. With the help of a dedicated Credit Counsellor, a DCP can also help minimize the total amount of interest the client will have to pay—since the Counsellor will negotiate the interest rate with creditors on the borrower’s behalf.

It also provides a great support mechanism for those who just need a little help taking control of their debt. 

Can I Use Credit Cards While on a DCP?

You cannot use credit cards when enrolled in a Debt Consolidation Program—at least, not unsecured credit cards. When you sign up for this debt management option, you need to give up your credit cards—as well as your other sources of credit. This is a necessary step for managing debt and reducing the risk of increasing your debt load while on the program.

For many, the act of destroying all of their over-limit credit cards can even be cathartic. Plus, not using them doesn’t usually have much of an impact on the client, since in most cases, their credit cards are maxed out anyway. 

People who enroll in a DCP may also have the option of using prepaid or secured credit cards. Preloaded card options allow people to continue to make purchases using plastic while using their own money and staying with a certain budget limit—though prepaid card users should still closely monitor their spending.

Who’s a Good Fit for a Debt Consolidation Program (and Who Isn’t)?

A Debt Consolidation Program is a great fit for anyone who simply has debt that they’re having difficulty paying down. They may also be getting collection calls or having difficulty saving every month. It’s also a good fit for people who aren’t paying their debts down quite as aggressively as they’d like to every month.

If you think you’re in this group, it’s extremely worthwhile to see if you qualify for debt consolidation.

Although it’s one of the best options for debt consolidation when you have bad credit, a DCP isn’t right for everyone. Those who might not be a good fit for a Debt Consolidation Program include people who have debt but are already able to make their payments easily and on time every month. They may find that it’s more liberating to handle debt on their own or they may want to avoid the temporary reduction in credit rating that a DCP can cause.

But it's important to be careful! Although someone might be up to date on payments, that doesn’t necessarily mean they are in a healthy financial position. Many people I see have never missed a payment in their life. Yet, they’re stuck in a cycle of paying interest, so their balances aren't changing or reducing. Being up to date on payments can sometimes be misleading, as it may not give an individual a true sense of their ability to pay off their debt in a reasonable amount of time.  

Speaking with a supportive Counsellor at Credit Canada will help people take a look at their finances with a "fine-tooth comb” to see if they are in a viable position to pay off their debt or not. This is what we do every day.

Another reason why someone may not want to sign up for a Debt Consolidation Program is if they don’t have a lot of unsecured debt compared to their secured debt. DCPs can only cover unsecured debt, like credit cards and payday loans, but not secured debt, like auto loans or a mortgage.

So, secured debts (meaning debts that have collateral) aren’t eligible for a DCP. People with a lot of secured debt but not much unsecured debt may want to consider alternative options, like refinancing.

What Are Some Alternatives to Debt Consolidation for People Who Are in Especially Challenging Circumstances?

A Debt Consolidation Program isn’t the only option for eliminating debt. Some more extreme options include things like consumer proposals or filing for bankruptcy. These are drastic options that could be a worthwhile “last resort” for those with a lot of unsecured debts and no means of paying it off within a reasonable timeframe.

While everyone has different needs and priorities when it comes to eliminating debt, the major thing I look at when deciding if a person should pursue insolvency versus other forms of debt relief is their debt-owed-to-income ratio.

A successful Debt Consolidation Program usually runs for four years or so (about 48 months). If a client has a debt load so big (compared to their income) that they cannot pay it off in 48 months, that’s when I start discussing options like bankruptcy or a consumer proposal.

In these cases, insolvency may be the best way to break the chains of permanent debt—even if it does lead to bad credit ratings for a while.

Have Bad Credit? Learn about debt consolidation options for bad credit now!

What about Consolidating Debt into Your Mortgage?

Another option is consolidating debt into your mortgage. This usually means breaking the current mortgage agreement you have with your lender and rolling your high-interest debts into a new mortgage. There are a few pros and cons for taking this option.

For example, there will be some added costs upfront for breaking your current mortgage agreement, such as a penalty fee, which can be over $15,000. There’s also the risk of a new premium from the Canada Mortgage and Housing Corporation (CMHC) being applied against the increased balance. This option might mean being in debt for longer. There's also the risk of running out of equity in your home—which can mean not having any equity if you need it to cover an emergency in the future.

On the other hand, this option has a chance of significantly reducing the interest on the debt owed—which can help make repayment easier. Also, unlike a DCP, consolidating your debt into a mortgage doesn’t require you to give up your credit cards—though this can mean running the risk of building up more debt!

What about a Home Equity Line of Credit?

Some people may find that it makes more sense to open a home equity line of credit (HELOC) to help cover expenses rather than consolidating debt into their mortgage. The HELOC option provides consumers with a revolving line of credit—putting a hard cap on their equity spending.

However, it’s important to note that HELOCs can have variable interest rates—which may mean paying more over time compared to other options.

What About a Consolidation Loan?

A debt consolidation loan can be a great option for simplifying your debt management if you have great credit. This is a loan from a single lender like a bank, credit union, or finance company that is used to pay off outstanding debt. With good credit, you can get a debt consolidation loan that helps reduce the overall interest on your debt.

If you have bad credit, however, this might not be the best option for debt consolidation. Bad credit usually means higher interest rates—which makes it a lot harder to pay off debt, especially a large loan like a debt consolidation loan.

If a borrower has bad credit, they might also need a cosigner with rock-solid credit in order to be approved for a debt consolidation loan—though that person will be assuming a significant amount of risk if the loan isn’t repaid.

So, if you’re looking for debt consolidation options for bad credit, it may be better to focus on a DCP.

Want to Learn More about Your Debt Consolidation Loan Options? Check out our guide!

How Does the Conversation about Debt Consolidation Options Start?

For Counsellors at Credit Canada (like me), the conversation typically starts with a phone call. I go over details like what the person has versus what they owe (assets and liabilities), their debt consolidation options, and what their personal goals are for dealing with debt—like being debt-free in time for a significant event.

The goal is to find the best consolidation method that fits each person’s specific needs.

After the phone call, assuming the DCP will be started/initiated, paperwork is sent out with details about the DCP and how it works. There are also areas in the paperwork for the client to sign confirming they understand what’s expected of them, as well as authorizing our agency to start taking appropriate action on their behalf.

It generally takes a day or two after getting back the signed forms for the Counsellor to start reaching out to creditors to begin negotiations and set up the DCP.

How Do Credit Counsellors Get in Touch with Creditors to Set Up the DCP?

When setting up a DCP, the communication between our Counsellors and our clients’ creditors is more automated. It starts with paperwork, emails, and, in some cases, even faxes being sent back and forth.

There does come a time where Counsellors will need to pick up the phone and call creditors to talk things out. It’s not too common, but it does happen from time to time when setting up a Debt Consolidation Program.

Are There Situations Where a Particular Debt Cannot Be Included in a DCP?

There are times where a creditor may not be able to accept the DCP (or where a Counsellor cannot get involved). This can include instances like an auto mechanic where a person owes money for services rendered, or when a friend or family member is owed money.

Scenarios like these usually involve a Counsellor trying to work out a monthly payment into the person’s budget so they can afford to pay that debt on their own while still making their monthly payments towards their DCP.

What Happens After a DCP?

A Debt Consolidation Program typically lasts 48 months or so. During that entire time, a client’s Credit Counsellor will be highly involved with their progress. In my own experience, from day one to the very end, I’m the main point of contact while other Credit Counsellors in our organization are “quarterbacking” the client’s file the whole way through.

After 30-45 days from starting the DCP, we have an appointment on the phone to make sure things are on track and to let the client know what their creditors’ responses were. Apart from that, Counsellors like to have regular reviews and appointments. I also invite my clients to reach out to me at any time with questions, comments, or concerns.

What Happens if You Can’t Pay the DCP?

While the hope is that the debt will be paid off in full after the 48 months are over (and the client can get this stressful chapter over with), this isn’t always the case. Sometimes, a client's financial situation might change after starting the DCP and they need more help.

For example, a debt consolidation client might lose their job partway through the DCP through no fault of their own—such as what happened to many Canadians during the COVID-19 pandemic. Or, they may have a significant health issue that prevents them from earning a steady income and keeping up with their payments.

When a client cannot pay, a Credit Counsellor will have another meeting with them to reassess their income and debts. If it's deemed that they can no longer make their DCP payments, we will discuss their other debt elimination and consolidation options—such as a consumer proposal or bankruptcy.

How Credit Canada Makes a Difference 

I have been a part of the Credit Canada team since 2002, and during that time, I’ve helped hundreds, if not thousands of clients along their debt-free journey. 

I recently spoke to a registered nurse (RN) who had signed up for our DCP. She had already tried reaching out to other organizations for help with her credit cards, but she ultimately couldn’t manage her debt on her own and came to us for help.

After signing up for the program, she reached out to me and had a collected sigh of relief over the phone. She mentioned that she had started sleeping at night again, and how helping her with her debt has helped her breathe easier. I thought this was really significant because she has been helping people with COVID-19 breathe easier as well in her line of work. 

The stress relief we can provide by helping our clients manage their debt and live more comfortably can impact other areas of their lives, too. Struggling with debt can affect our relationships at home and even our performance at work. In the case of my client and all frontline workers who provide direct support to others, helping them means they can help their communities and the people who depend on them every day. 

Are You Ready to Choose a Debt Consolidation Option?

Is debt consolidation right for you? Have you already started to look at your best options to help you manage or eliminate debt?

If you need help choosing the right debt consolidation option for you and your needs, or you’re already set on signing up for a DCP, you can reach out to the Credit Canada team! We’re here to provide you with support that’s judgement-free and confidential. All of our counselling is free, so we can help you get on the best path towards your financial wellness.

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