Weighing Your Options: Ontario Debt Consolidation vs. Debt Settlement

Debt is a huge problem for a number of Canadians. Equally damaging is choosing the wrong method to manage debt you can’t pay on your own. While both debt consolidation and debt settlement offer a way to reduce or settle these obligations, each option may affect your credit score and future financial opportunities.

Debt consolidation

When you enter an Ontario debt consolidation program with a bank or financial institution, they will loan you the money to pay off all of your debts and then you would pay off the new loan over time, often at a negotiated lower interest rate. However, the bank usually secures this new loan against your assets such as your home or car. When the consolidation loan is finalized, you make a single lower monthly payment to the consolidation company to pay off the new loan.

The main advantage of debt consolidation is that you may be able to eliminate your debt within five years or even less without suffering too much deprivation. Your bank or financial institution will also manage any paperwork, closing of accounts, and handling fees, relieving you of the inconvenience. Keep in mind though, that because your consolidation loan is secured against your assets, you could lose these assets by defaulting on your payments. In the meantime, it’s best to avoid making any new loans that can start the whole debt cycle again.

Debt settlement

When you enter into a debt settlement program such as a consumer proposal with a licensed administrator, a portion of your debt is relieved by your creditors. This type of debt solution may give you immediate comfort from your financial woes and make your monthly payments easier to manage. It can also enable you to start improving your credit score after you have successfully completed the program.

One thing you have to keep in mind when you go into debt settlement: your credit score may be negatively affected while you’re in the program. Of course, you can still improve your credit rating, but it may take a few years. Typically the fact of the settlement through a consumer proposal stays on your credit report with the credit reporting agencies for a period of three years from the date you finish the settlement plan, which could last up to five years. The good thing is, once your debts are settled, you can start rebuilding your credit immediately.

The fact is, none of the available debt solutions are completely free of any disadvantages. Talk to Ontario bankruptcy trustees and consumer proposal administrators like Paddon + Yorke Inc. to help you choose the best solution for your situation, and start solving your debt problem.