Debt Relief – What are the Options?

Learn the difference between a debt consolidation loan, a debt management program, debt settlement and bankruptcy

What’s the difference between a debt consolidation loan, a debt management program, a debt settlement and a bankruptcy?

Debt management, debt settlement, bankruptcy and debt consolidation are debt solution options for your unique financial needs. Understanding the difference between these four options makes it easier to decide which debt relief options will be the most effective for your situation.

If you’re struggling with debt and need help finding a plan that will help you gain financial control, we can help. Call Consolidated Credit today at to speak with a trained credit counsellor, or request a Free Debt Analysis. They can evaluate your finances, assets and debts to help you find the right debt solution for your situation.

Debt Consolidation Loan

There are two different kinds of debt consolidation loans:

  • Unsecured debt consolidation loan – A debt consolidation loan is where you take out an unsecured loan and use the money to pay off your high-interest credit cards. After paying off the credit card, you are left with only the loan to pay back each month. Your goal is to get a low enough interest rate to pay less every month and get out of debt faster. Much of your success with a debt consolidation loan is having the right credit scores to qualify for a good interest rate. If your credit scores are low, you may not be approved at all, or the interest rate will be too high to provide the benefit you need. Furthermore, you need to make sure you do not increase your debts before paying off the loan. If you use your credit cards before paying of a debt consolidation loan, you are increasing your debt burden and may end up with more financial stress than when you started.
  • Secured Consolidation Loan – Similar to the previous situation, the other option is taking out a secured loan instead of an unsecured loan. A secured loan is also called a home equity loan, since you put your house up as collateral in case you can’t pay back what you owe. While lower interest seems great, the tradeoff puts your home at risk so you can pay off your credit cards.

Debt Management Program

If your credit score is too low, or even just average, you may not qualify for a debt consolidation loan at an interest rate low enough to ensure you regain financial control. You may be better off using a debt management program. A debt management program helps reduce outstanding, unsecured debts by paying them off in full at a lower interest rate and at a lower payment so you can regain control of your finances. With a DMP, you may qualify for these low interest rates regardless of your credit score. You also have the support of trained credit counsellors to help guide you through the process.

Debt Settlement

Debt settlement, also known as debt arbitration, debt negotiation or credit settlement is an approach to reducing debt in which the debtor and creditor agree on a reduced balance that will result in the debt being settled at less than the full balance outstanding. In return for paying back a percentage of what you owe, your creditors agree to discharge the remaining balances on your debts. However, it may be viewed in a negative light because you have settled your debts versus paying them off in-full with a DMP. When you apply for new credit, a partial payment on your debt with debt settlement is likely to be more of an issue than paying off everything you borrowed under a debt management program.

Following are the differences between debt settlement and a debt management program:

Debt Management Program Debt Settlement
Outstanding debt (principal) paid-in-full Only a percentage of your outstanding debt is paid back.
Interest rates reduced to between 0% and 10% Normal interest rates are applied until your debts are discharged
Program takes between 3 to 5 years to complete on average Payment is made as a one-time lump-sum payment, or, on a shortened payment schedule arranged with your creditors
Credit account is frozen during the debt management program, then you may reapply once your program is complete All credit accounts included will have the remaining balances discharged and those accounts will be closed
May report to your credit profile that you are making payments through a Credit Counselling Service. Will remain on your profile for 2-3 years after completion of DMP Will report to your credit profile that you have paid less than the full balance outstanding and that you have settled the debt. Will remain on your credit report for 3 years after you have paid off the debt

Bankruptcy

Bankruptcy is a procedure administered under the Bankruptcy and Insolvency Act. Bankruptcy is designed to provide financial relief to individuals with overwhelming debt burdens; halting the legal actions of creditors. There are some concrete disadvantages to declaring bankruptcy and should only be considered as a last resort:

  • If you have non-exempt assets such as real estate, furniture, jewellery, etc., you may need to surrender them to your trustee to be liquidated to pay your creditors
  • Your credit history will be affected for at least seven years after discharge of the bankruptcy. It will be more difficult to take out a loan, open new lines of credit, or get a mortgage, and interest rates will be higher
  • Your credit accounts will be frozen upon bankruptcy and closed upon discharge from bankruptcy. You may apply for new credit once you have completed your bankruptcy.