How does debt consolidation work?


I don’t really have anyone to blame but myself for my debt problems. I realize now that I overspent and bought loads of things that I didn’t really need. But now, I’m sitting here with this huge debt cloud hanging over my head and I’m worried about the future. One of my friends suggested that I should think about consolidating my debt. It sounds like it could be a good idea but I don’t know a lot about it. So, how do debt consolidation programs work? Thanks,

Samir T.
Markham, Ontario


Thanks for the question. It sounds like you have reached the point where you want to make a change in your life. I don’t want you to be too hard on yourself but there comes a point in all of our lives where we have to realize that we are responsible for our own actions. That is true for how we eat, how we work, how we spend and pretty much how we do everything in our lives.

But sometimes it takes a shock (in your case, a financial shock), to make us change our ways. I’m not sure if a debt consolidation program will be right for you or not, but I’ll explain what it is and then you can make a decision.

Basically, a debt consolidation program is a way for you to make only one payment a month that will be disbursed to all of your creditors. The other added benefit is that you will end up saving money as interest rates will be reduced if you qualify for the program.

I’ll now briefly explain the five steps you’ll go through if you decide to consolidate your debts:

  • Step 1: A trained credit counsellor will examine your current financial situation including your income, debts and monthly budget. This analysis will determine if you are eligible for a debt management program or if another option is better for you.
  • Step 2: After the analysis is complete, you will be given an estimate of a future monthly payment and the length of time needed until you become debt free. If it sounds like consolidating your debts is right for you, you’ll be able to enroll in the program.
  • Step 3: In most instances you will be charged a small fee for enrolling in the program, send in copies of the bill/debts you want consolidated and you will have to sign some documents to get the program started. Once this process is complete, you will be able to direct any phone calls you get from your creditors to the debt consolidation company to deal with.
  • Step 4: As you progress through the program, you will send a monthly payment to the debt consolidation company which will be disbursed to your creditors. This payment will include a small monthly fee that goes to the company helping you service your debts. Generally, debt consolidation programs last for 4-5 years and during this time you will not be able to acquire anymore unsecured debt.
  • Step 5: This is the end of the program. You will have seen your outstanding debts decrease until they disappear. You are now debt free! It is likely that your credit will look better than at the beginning as you have been steadily making payments for the past few years. However, there will be a penalty listed on your credit report for up to three years after you have completed the program. But after that, it will be erased and you can start living your life again without the worry of being in debt.

Jeffrey Schwartz
Executive Director

Jeffrey Schwartz is the Executive Director of Consolidated Credit Counseling Services of Canada and President of the Credit Association of Greater Toronto (CAGT).

If you have a question about a debt management program or just about finance in general, Jeff is here to help. Send us an email with your question to [email protected]. You’ll get the expert advice you need and your question may be featured here on our website.