When you find yourself in debt it can become overwhelming. The more lenders you deal with, the more complicated it can become to balance payments and continue to meet the needs of your monthly budget. The good news is, there are many options available to help you overcome debt and work towards living a debt free life.

Debt consolidation has proven to be the saving grace for hundreds of thousands of Canadians who have found their debt difficult to manage. There are four consolidation options available making it easy to find a payment plan ideal for your individual needs. Here is a look at the pros and cons of each.

1. Debt Consolidation Loan

This is by far the best solution if you have managed to maintain a good credit rating despite your debt. A debt consolidation loan allows you to take out one loan in order to pay off all of your outstanding debt in a lump payment. This consolidates everything you owe into one easy monthly payment at the lowest possible interest rate you can find.

Pros:

• Debt is easier to manage with a single monthly payment
• Your consolidation loan is usually available at a lower interest rate
• You will have better cash flow and can depend less on credit
• Your debt will be paid off more quickly
• Your credit score remains unscathed
• Fees, if any, are low

Cons:

• You require collateral to secure the loan
• You must have a good credit score to apply
• Interest rates are higher than other options such as a home equity loan or unsecured debt consolidation loans

Best When:

• You have managed to make your payments for all of your loans on time
• You have a steady income
• Your total monthly minimum debt payments aren't too high
• You have some good security for a loan

2. Consumer Proposal

A consumer proposal offers an option for those who fear they might be on the verge of bankruptcy. Working with a trustee, you can look at all of the debt you have acquired and prepare a proposal designed to pay back as much of your loans is reasonable based on your current financial situation.

The prepared proposal will outline requests that might entail the removal of interest as well as to negotiate payment for less than you owe. Your trustee will come up with a plan that works in your favour yet does not leave your creditors in the lurch. This helps ensure creditors are more likely to agree to the terms.

A consumer proposal is usually preferred to bankruptcy by lenders as they are guaranteed at least some, if not most of the money owed them. Once the proposal is filed, you have to follow through as it is legally binding.

Pros:

• You avoid bankruptcy if your proposal is accepted
• All credit calls and action against you by your creditors cease as soon as the proposal is filed
• You avoid interest and pay less than the full amount owed
• You reduce all of your payments to one manageable payment monthly
• You can rebuild your credit rating more quickly than you can after filing for bankruptcy

Cons:

• You require the creditors who hold at least half of your debts to agree to the proposal
• If an agreement is not reached you are forced to file for bankruptcy
• If you do not manage to make the agreed-upon payments you cannot file additional proposals and you have to file for bankruptcy
• A consumer proposal appears on your credit report which negatively impacts your credit rating
• Your negative credit score remains while you are on the program and follows you for three more years once the debt is repaid
• A negative rating can last as long as eight years following a consumer proposal

Best When:

• You don't qualify for a debt consolidation loan
• You wish to avoid bankruptcy
• You are receiving endless collection calls
• You are no longer able to make loan payments on time
• Your credit score is suffering

3. Debt Management Program

A Debt Management Program allows you to consolidate all of your credit card payments into one monthly payment. This is arranged through a non-profit credit counselling organization but can also be made using a trustee. The program is presented to the credit companies on your behalf and must be accepted by all creditors for you to proceed. This is usually acceptable to the creditors as it shows your sincerity in wishing to pay back your debt.

Once arranged you make a single agreed upon payment to the debt counsellor who then disperses the money to your creditors. On average you can pay off debt in as little as three years.

Pros:

• Your interest rates will be drastically reduced or even removed completely
• You have just one payment to worry about each month
• You can pay off your debt faster
• Quick credit score repair within as little as two years

Cons:

• There is a fee added to your payments to cover the administrative fees for the non-profit credit counselling
• There is a chance your creditors will not agree
• Negatively impacts your credit score during the program and for two years following program completion

Best When:

• Your debt is credit card related
• You wish to make every effort to repay your debt
• You have not been able to make payments
• You do not have the credit score required to obtain a consolidation loan
• You do not wish to face the longer credit implications of a consumer proposal