What is Debt Consolidation?

Unless you’ve been living in a cave the last several years you have to heard some of the ads for debt consolidation settlement and management plans filling the airwaves and the newspapers and magazines. Many Canadians are confronted with more and more monthly bills, especially credit card bills. As times get tough, many of us turn to our available supply of “plastic; sometimes even using one card to make the minimum payment on another. If this sounds like you, debt consolidation may be a way out. Basically, there are two kinds of debt consolidation:

1. Debt Consolidation Loans.
2. Debt Repayment Plans.

What happens in both is you consolidate or combine multiple monthly bill payments into a single payment. Before we look into the advantages and disadvantages of each you should be aware that both approaches could actually worsen your situation over time. Many consumers who started out with some form of debt consolidation end up in personal bankruptcy at a later date since they fail to manage their spending. Reducing the total monthly payment for some is an open invitation to keep spending, and in some cases, to spend even more. Having said that, let’s first look at debt consolidation loans.

Debt Consolidation Loans

If you own something of value – like your home or an expensive car – you can use the equity you have to take out a consolidation loan to pay off your other debts. Now instead of making five or six credit card payments a month, you have only the consolidation loan payment. If your car is fully paid for and it is worth $10,000; you have $10,000 in equity. If your house is worth $200,000 and your mortgage balance is $120,000, you have $80,000 in equity.

If you are in financial trouble and you have significant equity, a debt consolidation loan coupled with a serious attempt to establish a budget and stick to it, may be your best option.

Debt Repayment Plans

Another approach is to secure the services of a Credit Counseling service or company. Depending on how much you owe and how much you own, the service can set up a debt management or debt settlement plan where you will stop paying your creditors and make a single monthly payment to the counseling service, who will then apportion out your payment to your creditors.

There are both for profit and not for profit counseling services and companies and you should be very careful in selecting one, as there are many scam artists out there. While the Internet is a good place to begin your search, make sure you check the reputation of any service you are considering with your local Better Business Bureau.