Seasonal expenses have a way of highlighting financial pressure. Summer programs, travel, childcare, and general lifestyle costs tend to increase at the same time. Running the a/c and family bbq’s, weddings, road trips to visit family – these costs pile up fast. When your budget is already strained and you do need to be part of social life (we are all human!) we need to make smart choices so the choices we do make come without doubt or guilt. If you are already managing existing debt, the summer costs can make your situation feel tighter than it did earlier in the year.
It is at this point that many people should begin exploring debt consolidation as a way to simplify payments and create more room in their monthly budget.
Debt consolidation can be effective in certain situations. However, it is important to understand that there are different ways of doing this and what each option actually does, and just as importantly, what it does not do. Not all consolidation solutions reduce debt, and not all of them improve your long-term position. In fact, some of them drag other people into your debt (e.g. co-signers).
What debt consolidation actually means
At its core, debt consolidation is the process of combining multiple debts into a single payment. This can be done through a loan, a line of credit, refinancing, or a formal restructuring program.
The appeal is straightforward. Instead of managing several payments with different due dates and amounts, you have one payment to manage. In some cases, the interest rate may also be lower, which can reduce the cost of borrowing.
What consolidation does not do is reduce the principal amount you owe. It simply reorganizes your existing debt into a different structure.
Understanding the finer points is important when deciding whether consolidation is the right approach for your situation.
Home refinancing as a consolidation tool
For homeowners, refinancing can be one of the more commonly considered options. This involves using the equity in your home to consolidate unsecured debts such as credit cards or personal loans into your mortgage.
If there is enough equity in the property this approach can reduce your monthly payments because mortgage interest rates are typically lower than unsecured credit. It can also simplify your financial obligations by rolling multiple debts into one.
However, refinancing comes with specific requirements. You need sufficient equity in your home, stable income, and a credit profile that supports approval. If any of these factors are limited, refinancing may not be available. If there are owners on title other than you each owner needs to be in agreement.
Home (also known as mortgage) refinancing does not eliminate debt. It converts unsecured debt into secured debt tied to your home. This changes the nature of the obligation and should be considered carefully. Bluntly, if you cannot make these additional mortgage payments in the future your home is at risk of being seized by your mortgage lender.
Sometimes the Big 6 Bank mortgage lenders will not lend you all you need (they are conservative) so you can be dealing with Schedule “B” or even private mortgage lenders. These other lenders carry higher interest rates and are often one-year term (so 12 months later you can anticipate being back paying lender fees, broker fees, appraisal fees, legal fees – if you qualify. If you don’t qualify again, you could lose your house). Please think very carefully before turning unsecured debt into secured debt.
If you cannot borrow enough to pay off all the unsecured debts, then we encourage you to speak with a Licensed Insolvency Trustee. You may still have to juggle multiple payments per month. You will need top carefully consider which debts to pay off and which to consolidate based on interest rates, repayment terms, timing of monthly payments, any guarantors of co-signers, if any security was given for those debts and super powers of CRA to enforce. We write more about this below.
Where there is plenty of equity in the home refinancing of the home can be your best choice.
Debt consolidation loans and lines of credit
Another common option is an unsecured debt consolidation loan or line of credit. These products are designed to combine multiple debts into a single facility with one payment.
In situations where income is stable and credit remains strong, this can be a useful tool. It may reduce interest costs and simplify repayment.
However, this approach still requires full repayment of the original debt. If your financial situation has not improved, or if your current debt level is already difficult to manage, taking on a new loan may not resolve the underlying issue – it may simply mask the reality for a while.
It is also worth considering habits. If access to credit remains available after consolidation, there is a risk that balances can build again over time, creating a cycle that becomes increasingly difficult to manage.
Many consolidation loan providers look for security (e.g. a lien on your vehicle) or a co-signer / guarantor. If you are under stress paying your debts at present then dragging your family member or friend into the situation or putting your vehicle or other asset at direct risk is probably not the best solution for you.
Is more debt the right solution?
When considering consolidation, it is useful to ask a direct question. Does taking on new debt improve your position, or does it put a Band-Aid over a broken bone?
If your current challenge is cash flow timing or interest rates, consolidation may help. If the challenge is the total amount of debt relative to your income, adding a new loan may not be effective.
This distinction often determines whether consolidation leads to improvement or simply delays dealing with a larger issue.
Orderly Payment of Debts (“OPD”) or Credit Counselling
These two options have many of the same characteristics of consolidation loans.
OPD is available in Alberta but not in Ontario.
Credit counselling is available across Canada but not able to deal with all creditors. Unlike a consumer proposal or OPD credit counselling allows for individual creditors to opt out (or if they involve CRA or other government debts they are not allowed to be included) which leaves you with only a partial solution.
Both programs have fees attached and both negatively impact your credit bureau.
If you are in Alberta and can afford to repay your debts OPD should be discussed with the Licensed Insolvency Trustee in comparison to other options.
Credit counselling, while those agencies do push it as a solution – it is all they sell – for large debt balances it seems to work better for low debt levels.
An affordable and fair alternative: consumer proposals
For individuals whose debt levels are no longer manageable through traditional consolidation, a structured solution may be more appropriate.
A consumer proposal is a formal process where Federal laws allows you to consolidate your debt into a single monthly payment, eliminate interest and in most cases reduce significantly the total amount you repay.
Unlike a consolidation loan, a consumer proposal does not usually require full repayment of your debt. The Licensed Insolvency Trustee you choose manages reaching a fair (to you and the creditors) settlement with the creditors.
This structure provides several practical benefits. Interest stops, most collection activity is halted, and payments are set at a level that reflects your financial capacity. If the majority by value of the creditors accept the offer it is by Federal law binding on those creditors who said nothing or even voted against. There are time limits for the creditors to vote so the process does not drag on.
CRA tax debt can be covered by a consumer proposal.
For many individuals, this results in a significant reduction in monthly payments, often in the range of fifty to seventy five percent depending on the situation.
What happens to collection activity?
One of the more immediate differences between informal consolidation and a formal proposal is how collection activity is handled.
With traditional consolidation, existing collection activity may continue until debts are fully repaid. With a consumer proposal, most collection actions are required to stop once the proposal is filed. Speak with the Licensed Insolvency trustee to find out more about court fines and support payments (along with other “survivable’ debts).
Collection activity leads to law suits, court appearances and the wage garnishments and restrictions on bank accounts in many cases. If you have your RRSP or other investment at the same bank where you owe money, they may be able to take that investment for their debt alone (called right of offset).
If you are currently navigating this type of situation, speaking with a licensed insolvency trustee in Toronto or a licensed insolvency trustee in Alberta can help clarify what protection may be most suitable for you. In giving such input, the LIT will consider many factors in addition to “only the numbers” – e.g. age, health, job stability and prospects, life events, what assets you want to keep (e.g. car, house, retirement funds).
Flexibility and early repayment options in a consumer proposal
Another aspect that is often overlooked is flexibility. Many consolidation loans come with fixed repayment terms that must be followed regardless of changes in your financial situation. You may not be allowed to repay early so have to pay interest.
A consumer proposal provides more flexibility. If your financial position improves, you can pay it off early without penalty. This allows you to shorten the timeline and move forward more quickly – including rebuilding your credit score faster.
It also provides a clear end point. Once the proposal payments are completed, any unpaid unsecured debt at time of making the consumer proposal are set to zero.
Impact on credit and long-term positioning
Credit impact is an important consideration in any financial decision. There is often concern that formal solutions such as consumer proposals may have a long-term effect.
It is useful to consider the broader context. Carrying high levels of debt and missing payments will also impact your credit profile. In some cases, unresolved debt can affect credit for longer than a structured solution.
A consumer proposal is removed from your credit report at a defined period after it is completed. During that time, there are practical steps you can take to rebuild, including responsible use of credit products designed for that purpose.
Choosing the right approach for your situation
There is no single solution that applies to every situation. The right approach depends on your income, debt level, assets, overall financial goals, stage of life, future financial prospects, health, etc.
Debt consolidation through refinancing or loans can be effective when the underlying financial position is stable and manageable. Structured solutions such as consumer proposals are more appropriate when repayment is no longer realistic under existing terms.
A Licensed Insolvency Trustee is obligated by ethics and law to look at all your possible solutions with no bias. This can often be done in less than one hour – even via video chat or telephone if in-person meeting is not suitable for you).
A practical next step
If you are considering debt consolidation heading into the summer months, it is worth taking a formal look at all your options before committing to a new loan or refinancing arrangement.
Baigel Corp works with individuals across Ontario and Alberta to help assess financial situations and explain available options clearly. Consultations are confidential and there is no cost to understand what approaches may be appropriate for you.
If you would like to explore whether consolidation or a structured solution makes more sense, (and any other potential options) speaking with a licensed insolvency trustee can provide the clarity you need. Visit www.baigel.ca
*Baigel Corporation is a federally regulated Licensed Insolvency Trustee