We have all heard of debt consolidation. In
debt consolidation you borrow from one lender to repay
other debts. The most common example would be getting
a bank loan to repay your credit card debts.
The advantage is obvious. You pay off high interest
rate debts with a lower interest rate loan, so you
pay less in interest, which means you get out of debt
How do I know if debt consolidation is a better than bankruptcy for me?
Here are the questions you should ask yourself to
determine if debt consolidation is your best bankruptcy
Do you qualify for a debt consolidation loan?
To qualify for a debt consolidation loan, you need
an income to repay the loan. If you are not working,
or if you don't earn enough to repay the loan in a
reasonable amount of time (up to five years), you
won't qualify for a consolidation loan.
Do you have security for the debt consolidation
loan? If you own a house that is worth more than
your current mortgage, you may be able to use your
house as security for your loan. A car or investments
can also be used as security. A secured debt consolidation
loan carries a lower interest rate than an unsecured
If you own your own home, read our articles on Getting
a Mortgage to Pay off your Debts and on Three
ways to borrow against your house as a bankruptcy
alternative for more information on using your
home as security for a debt consolidation loan.
How much can you afford to repay each month?
This is a difficult question for most people to answer.
Start by making a personal
budget to determine what you can afford to pay
each month. If you can only afford to repay $300 per
month, but the debt consolidation loan will cost you
$700 per month, a debt consolidation loan is not the
answer for you.
Is your income stable? Before entering into
a five year repayment plan on a loan, make sure your
income is stable. You might be able to make the payment
this month, but what will happen if your hours get
cut back next month, or if you get laid off? Your
payments don't stop when your income falls, so make
sure the payments are reasonable.
If you don't qualify for a debt consolidation loan,
or if you can't afford to repay it, consider, credit
13 Wage Earner Plans, or a consumer
proposal as your best bankruptcy alternatives.