What to do if you fail your debt consolidation plan

You consolidated your mountain of debt from your line of credit and credit card bills, and you had good intentions to stick to your debt consolidation plan. But then, you lost your job, your car broke down, you gave into spending temptation or your payments were just flat out unmanageable. Either way, you're back at square one.

If you're in this situation (again), you're far from alone. Scott Hannah, president of the Credit Counselling Society (CCS), says his organization estimates that at least a third of clients who sought the CCS's help were there because of a failed debt consolidation plan. Such plans include balance transfer credit cards, a debt repayment plan or even a personal loan.

"They hadn't done their homework ahead of time, or set a realistic and manageable budget," Hannah says, "and people forget when trying to pay down debt that emergency savings plans are also important. You fall back to old ways."failed-consolidation-plan

"You have to look at all of your options and if you want to make meaningful changes, you have to have deep discussions instead of jumping into another arrangement," says Andre Bolduc, an Ottawa-based expert and senior vice president at BDO Canada.

If your consolidation plan has fallen through, the only thing to do is
pick yourself up and go at it again. Try this three-step approach:

Step 1: Figure out why you failed.
Debt consolidation plans are often dubbed "Band-Aid solutions" because you're covering the surface of the problem without addressing the root. You address your bills and interest charges, but not your bad spending habits.

Bolduc says a lack of planning and budgeting are what's most often to blame for a failed consolidation plan. In other instances, consumers don't cut up their credit cards after they've consolidated their debt, and go back to spending on them, leaving them with the consolidated payments plus new credit card payments.

Sometimes, it's just Murphy's Law: you lose your job or your roof needs a major repair, and you don't have an emergency savings fund to fall back on. Suddenly, you're turning to credit to make ends meet without a plan to repay the new debt.

Step 2: Assess and accept the repercussions.
Depending on how you built your debt consolidation plan, you will face repercussions for missing payments. The most common consequences include spiked interest rates, losing an asset you used to secure the debt, a negative credit score impact or dealing with a co-signer who's now on the hook for your debt.

If you consolidated your debt onto a 0 per cent interest balance transfer card and you've missed a payment, chances are you're going to lose that optimal APR and be stuck with the regular rate, which could be in the high teens. Hannah has seen rates climb from as low as 5 per cent to 19 per cent. There isn't much you can do about this, other than prepare for the hike.

In other instances, you may have used assets to secure a consolidation loan. For instance, you may have used a lien on your home or car as collateral, and those possessions could be on the line if your creditor decides to take action for missing payments. It's worth asking for a second chance or talking to your creditor to let them know you have a new repayment plan in place for the missed payments.

If you haven't missed payments yet, but know you're headed down a dangerous path, see if you can work out another arrangement. But if you're evasive and missing payments with no explanation, you may well lose your security.

Similarly, if you used a co-signer to secure a consolidation loan, it's time to let him know that you are unable to make payments. Your creditor will demand that your co-signer pay for you, which may mean you'll need to work out a way to pay back your co-signer (which could be easier if, say, you can work out a smaller, bi-weekly payment to him instead of one bigger, monthly payment to the creditor).

Finally, be prepared for your credit score to take a hit. You'll be on your creditor's radar quickly if you're missing payments on a large consolidated loan. "The minute you default on your debt, your credit rating is hurt and every month that goes by, the negative impact continues," Bolduc says.

Step 3: Consider your options.
After you've come to terms with the fallout of missing your payments, you need to act. There are a few routes to take in rejigging your repayment plans:

  • Contact your creditor or financial institution: If you've consolidated your debt onto a credit card, line of credit or secured loan, you should call your creditor to let them know that you're falling behind. "Tell them this is unrealistic and you need to renegotiate the timeframe," Hannah says. Changing your repayment plan from two years to three could offer the relief you need. You could even offer to make amends by making extra payments when possible.

  • Seek help from a family member or credit counsellor: If you know someone who is well versed in personal finance and constructing a budget, she could be invaluable to you. Hannah says if it makes you feel comfortable, this person could accompany you if you set up an appointment to speak with the bank. Or, a credit counsellor could be the perfect mediator between you and your creditors. Counsellors often help with getting interest rates waived, for example. They'll also give a sober review of your budget to see if you have any wiggle room in your repayments.

  • Consider a consumer proposal or bankruptcy: If you feel like you're in over your head, Bolduc says that meeting with a bankruptcy trustee may help, too. The trustee must consider every option available to you before suggesting a debt settlement or bankruptcy. For instance, he may suggest a consumer proposal, which could provide you with a payment that's less than your outstanding debt, Bolduc says.
See related: 5 factors in choosing a debt consolidation plan, 4 common debt consolidation mistakes
Published October 2, 2015

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