How to Choose the Right Debt Consolidation Plan

How To Determine Which Debt Consolidation Method is Right for You

If you are struggling to pay off your debts but aren’t sure if bankruptcy or a consumer proposal are the right choice for you, debt consolidation can be an option. But with multiple ways to consolidate your debt, it can be difficult to know which option is best.

To help you better understand this process, we will explain what debt consolidation is along with the different ways to consolidate your debt. We will also explain the pros and cons of debt consolidation, along with other debt relief options like consumer proposal, bankruptcy, and debt counselling.

What is Debt Consolidation?

Debt consolidation is the process of combining most or all of your outstanding debts into a single loan, known as a debt consolidation loan. Many lenders offer a variety of consolidation products.

What Are the Pros and Cons of Debt Consolidation?

There are two major pros to obtaining a debt consolidation loan. First, you end up with one single monthly payment to keep track of, instead of several bills coming in at various times of the month. Second, you will usually pay a lower interest rate than you did on your individual debts, though this will depend largely on your current credit score and the type of loan you obtain.

The cons: Lenders often require a strong credit score (or a willing co-signer, if you don’t have a good score) to get approved for a consolidation loan with ideal rates and terms. Another downside is that you are not eliminating your debt and still have to pay it off.

How Does it Work?

Once you are approved, your lender uses the debt consolidation loan to immediately pay off your other debts, and then you repay the loan in installments over a fixed period of time, usually three to seven years.

What Are the Different Debt Consolidation Options?

There are several options for debt consolidation loans, depending on your current financial and credit situation.

Personal Loan

Obtaining a personal loan from a bank or other lender is one option for consolidating your debt. But if you have a low credit score, too much debt, not enough income or collateral (such as a home), or a lack of credit history in Canada, you may not get approved for such a loan, either with or without a co-signer.

Home Equity Loan/Line of Credit

If you own a home, you may be able to use the equity you have built up in the property (that’s the value of the house minus the amount remaining on your mortgage) to secure a loan or home equity line of credit (HELOC) for up to 80% of value of the home.

Line Of Credit

If you have other property (such as real estate, mutual funds, or stocks) to use as collateral, you may be able to obtain a secured line of credit from a lender in order to consolidate your debt.

Which One is Best?

If more than one of these options is available to you, the one with the lowest interest rate might be the most tempting, and most often, it is the best option. After all, that’s why you’re consolidating your debt in the first place – to reduce your monthly interest payments. However, it’s important that you also look at things like fees and whether you’re required to pay off some of the debt each month or, as with a line of credit, you can just keep borrowing (this may not be ideal if you’re already deep in debt).

Why You Should Also Seek Out Debt Counselling

If you’ve incurred enough debt that you need to seek out a consolidation loan, you may benefit from debt counselling to help you work on your financial habits and ensure that you don’t end up back at square one in a few years’ time. Our team at Baker Tilly includes qualified consultants who can help you come up with a plan to free yourself of your debts and improve your financial health.

Consider Other Debt Relief Solutions Available

If your debt load is too large for a consolidation loan to be an effective solution, you still have other avenues of debt relief open to you, including bankruptcy and consumer proposal.


An assignment in bankruptcy will eliminate the majority of your unsecured debts; however, this decision should never be made lightly, as it will also involve seizure of most of your assets (with some exemptions) in order to repay your creditors. Your credit score will also be reduced to the lowest possible rating, and an R9 rating will appear on your credit report for 6 years after the date of your discharge with Equifax and 7 years after the date of discharge with TransUnion for a first-time bankrupt. For subsequent bankruptcies, the R9 rating will appear on your credit report for 14 years after the date of discharge.

Consumer Proposal

In most cases, a consumer proposal is a more favourable option, as it allows you to significantly reduce the amount of debt you owe – often by up to 70 per cent – but unlike bankruptcy, you get to keep your assets.

Under a consumer proposal, you’ll make regular repayments on the remaining amount of your debt for a period of up to five years.

This option is available to those who owe no more than $250,000, excluding the mortgage on your principal residence.

Keep in mind that your credit score also takes a hit with a consumer proposal, as an R7 rating will appear on your credit report for the duration of the consumer proposal and will remain there for 3 years after it has been completed.

The Takeaway

Debt consolidation can be a lifesaver for people who are just starting to fall behind on their payments but haven’t hit the point where it will be impossible to ever repay their debts in a timely fashion. If you have decent credit and just need some help getting your debt under control, consider a consolidation loan, consumer proposal, or bankruptcy. Our team of experts can help you determine which option works best for you.

Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!