How To Get Out Of Debt

From Newfoundland to Alberta, you’re just one of the millions of Canadians who have effectively borrowed from their future selves to pay for basic necessities in the here and now. Many see no problem with doing this. After all, the past is full of examples of folks who have worked their way out of serious personal debt problems through determination and discipline.

However, you shouldn’t necessarily expect your case to follow suit. Every debt situation is different: If you have poor credit, high credit card balances, and crushing interest rates that seem to negate your monthly payments, you may not be able to escape from debt by yourself.

Fortunately, you don’t have to learn how to consolidate your debt on your own. Once you’ve made the decision to pay off your obligations and get your finances back on track, you’ll have several options.

There are four major types of credit relief: debt consolidation loans, bankruptcy, credit counseling and debt settlement. Depending on the mix of debts that you’ve built for yourself, any one of these options may prove to be the answer to your financial puzzle.

From Quebec to British Columbia, debt consolidation loans are Canadians’ most popular debt relief choice. When you take out a debt consolidation loan, you’re making a bargain: Since the loan’s principal is usually large enough to cover your existing obligations in full, your lender will expect you to pay off your current creditors immediately upon receipt of the loan. Once that’s done, you’ll be responsible for making a single monthly payment to your debt consolidation lender until you’ve paid off the new loan in full.

It’s helpful to think of your debt consolidation loan as a refinancing tool. If you’re barely able to afford the monthly payments on your existing lines of credit, your balances are probably accruing interest at unseemly rates. If you’ve missed payments in the past, you may be on the hook for penalty interest, late fees and other charges as well.

Debt consolidation loans may lower your interest rate significantly, especially if you’re in the penalty. This can translate into big savings: Reducing the 20 percent effective interest rate on a balance of $10,000 to 10 percent will save you $1,000 per year. As debt consolidation loans typically take five years or more to repay in full, your total savings may exceed $5,000.

These products come with some drawbacks. For one, your debt consolidation lender can’t reduce the principal amount that you owe your existing creditors: If you owed $10,000 before you took out your loan, you’ll owe $10,000 after you take out your loan. They can also be hard to come by: If your credit score is below average, debt consolidation lenders will either turn you away outright or ask you to pay through the nose for your cash.

If you’ve tried using a debt consolidation loan to solve your financial problems and still can’t figure out how to consolidate your debt, you may need to consider filing for bankruptcy. If you do, your creditors will stop harassing you almost immediately, you’ll see most or all of your debts forgiven, and you’ll be able to start from scratch with a tighter budget.

However, bankruptcy can cause serious headaches. Unless you don’t own much, you’ll exit the process with fewer assets and a rock-bottom credit score. It can take years to rebuild your financial reputation after bankruptcy, so it’s best to exhaust all other options before taking the plunge.

Credit counseling should be one of those options. While your credit counselor can’t reduce the principal on your outstanding loans, they can negotiate sharp reductions in your annual interest rates. They have a vested interest in keeping you solvent: Since they receive much of their funding from banks and credit card companies, they don’t want you to default on your loans and rob their benefactors of thousands of dollars.

Unfortunately, a successful credit counseling program can take five to seven years to complete. If you’re wondering how to get out of debt sooner than that, look to debt settlement. Depending on the size of your debts and your creditors’ willingness to negotiate, this process typically wraps up in 12 to 48 months.

What’s more, debt settlement providers make it their mission to negotiate actual reductions in your outstanding principal balances. The exact amount that you’ll save depends in large part on your creditors’ receptiveness to the process, but it’s not unusual for debt settlement to slash 40 to 60 percent from a typical debt load.

While there’s no magic debt-relief bullet, these four proven methods can help you escape your creditors and get your life back on track. Weigh your options carefully and make the call that best suits your needs.


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