Recently, advertisements have appeared in Quebec offering non-bank consolidations offered by organizations registered in other provinces. This is a loan that can be repaid over a period of several months for a fee.
Are you considering using it?
Before you make your decision, read the story of Laurence, a single mother of two, ages 12 and 15, who owes $37,000 in debt.
A deficit budget
After Laurence’s recent split, he had to move and refurnish and temporarily stopped working. She currently receives $4,000 in disability insurance benefits in addition to alimony and child support, for a monthly total of $4,500. After selling the family home, she used the proceeds to buy a more modest home near the children’s school. But his debt has increased and now totals $25,000, plus $12,000 in back taxes.
Laurence’s monthly commitments are mainly as follows:
- Mortgage and taxes: $2525
- Electricity, cell phone, groceries and car: $1,500
- Credit card and loan refunds: $875 (excluding tax refund)
So, all in all, she has to pay $4,900 a month and can’t make ends meet.
At her wit’s end, she responded to an ad offering “consolidation” outside of the banking sector with an Ontario-registered organization.
Weigh the pros and cons carefully
“Before accepting, Laurence came to meet us to understand the differences between the consumer proposal and this type of agreement, as well as the pros and cons of each solution,” explains Pierre Fortin, licensed insolvency practitioner and President of Jean Fortin and Associates.
The organization offered Laurence to pay off her $25,000 in credit card debt and loans in monthly installments of $530 plus $59 in fees per month. However, that doesn’t include the $12,000 in taxes owed because the organization doesn’t have an agreement with the governments, so Laurence has to reach an agreement with them himself.
This type of offer is rare in Quebec and very different from the consumer offer provided by law. It therefore only includes creditors who agree to do business with the organization. In addition, each creditor must abide by the agreement and those who refused must be paid separately.
On the other hand, with a proposal, all unsecured creditors are part of the agreement and a majority vote commits them all to submit to the proposal.
Another key difference: each creditor may or may not charge interest on their debt, while a claim does not accrue interest.
With these bank-independent consolidation offers, the monthly payment is determined according to the amount of debt included in the agreement. In the proposal, the monthly payment is based on the financial situation and ability to pay. Because of this, a proposal often only offers creditors a fraction of the amount of the debt.
The organization’s fees are set by them and paid by the customer in addition to the amounts to be reimbursed. In addition, they are expected to be able to accept funds from creditors without having to disclose the amount. In the proposal, the fees are paid by the creditors and are regulated by law.
Finally, note that with a consolidation of this type or a consumer proposal, the credit rating (R-7) remains the same even if you pay off 100% of your debt.
Each case is unique
“Every situation is unique. Just because a friend has consolidated their debt doesn’t mean it’s the best solution for you. “All solutions have advantages and disadvantages that have to be carefully considered, because you have to live with the decision for several years,” recommends Pierre Fortin.
In Laurence’s case, she instead opted for a consumer proposition at the interest rate of $400 per month for 60 months ($24,000) with no interest to pay off all her debts, including taxes. She can also keep her house, furniture and car.
Advice
A solution may seem interesting to us, but if we carefully analyze it, we notice disadvantages and shortcomings. The first step is to make sure the solution includes all of the debt and not just a portion of it.
Take the time to review all your options and seek advice from professionals who specialize in personal finance.