Consolidation advice - credit union? Previous bankruptcy on file

Consolidation loans rarely work in practice.

Due to bad credit and elevated debt level relative to income, most lenders are redundant to take the risk on you. This unless they charge you very high interest rates - usually worse than credit cards. Fairstone and sub-prime lenders come to mind. It is not unheard of to see 30-50% APR, before extra fees. As result, you’ll end up paying even more.

However, depending on how the consolidation loan is structured, your credit score may increase. Credit scores decrease with increasing debt utilization ratios of revolving credit (e.g. lines of credit, credit cards; debts where you can choose to use a certain portion of what’s available).

So suppose you have $20,000 of Visa debt and that is also the credit limit of your Visa(s). You rolled it over to a $20,000 loan with a fixed 36 month term. This is an instalment loan rather than revolving credit with some $X limit and $Y usage, so your credit score should gradually increase. Lenders will see it as some term loan versus maxed out credit card(s).

Debt Settlement:
Alternatively, you can tell your creditors that you’re considering an insolvency proceeding (e.g. bankrupt) and you can offer to settle the debts today for some $X amount. This has to be done correctly, especially by making sure you read all the fine print of whatever agreement you generate. Reduced repayment rates of 50% have been heard of, but it is a case-by-case basis. This is like playing chess, as the creditors see options like:

- They have to hire a collections Agency, and/or sue you. Typical Collections Agencies function on contingency (commission of collected money); 20-30% rates are common. So the creditor can potentially recover 70-80% of the debt.

- As for suing: the average 2-day civil trial costs a bit over $30,000 in legal fees. To attend a hearing, usually $5,000+. To file a proceeding: seen anywhere from $1,000-2,000+. Add another $100-200+ for a Process Server to serve you, which can dramatically rise if you are very difficult to locate. The creditors would claim their legal fees against you - but - if you dispute the claim and even if they win, on a good one they’d be lucky to see 30-40% of their legal fees rewarded.

Then even if they win, they have to undergo the Enforcement process (filing, then seizure and/or income garnishment).

So in reality, unless the debt is in excess of $10,000-15,000 - and you actually have assets recoverable, creditors likely won’t sue you. Collections actions very likely will happen, which will turn into annoying harassing phone calls on a daily basis. But if you simply don’t pay them, then their alternative is to give up or sue. Much of the time creditors will try to “work with you”, such as reducing interest or payments temporarily. This in hopes to avoid costly collections actions, litigation, and/or destroying a previously good relationship with you and sacrificing their reputation.

Debt settlement also is the least credit-damaging avenue to settle the debt for a reduced amount. But, you don’t have the legal protection other options offer; banks can still try to pursue you for outstanding debt.

The alternatives to debt settlements are the government-sponsored orderly payment of debts program, or insolvency: consumer proposal or bankruptcy.

Orderly Payments of Debt Program:
- Once arranged, creditors can’t pursue you for anything else. Your outstanding debt is converted into up to a 5-year 0% loan. Your credit is crushed to a R7 Rating (worst next to bankruptcy) while you’re repaying the loan, plus 2 years after.
Not really worth it unless you’re looking to get out of very high interest rates and want to take up to 5 years to repay the debt. Or, you don’t want a public record of this for the rest of your life.

Consumer Proposal:

- A more formal, legal version of settlement where a Stay or Proceedings is filed. This also blocks creditors from taking legal action against you.
- Basically you’re paying back only some X% of your debt over up to 5 years.
- It is in effect if more than 50% of your debt holders accepts the proposal. For example, if you owe $55,000 to creditor A and $45,000 to 5 others: the proposal is in effect if A says yes.
- Your credit is crushed for 3 years after you’re done paying off the Proposal.
- The trustee filing for you charges $1,500 + 20% of your monthly payments.
- There also is a permanent public record of you filing one, even after it disappears off your credit report.

What affects the chance of having the Consumer Proposal working? It looking better than if you were to go bankrupt.

More on that below.

Bankruptcy:

- The most powerful option of the above.
- A Stay of Proceedings is filed, blocking creditors from pursuing you.
- The insolvency trustee takes all your assets, except property where you have $40,000 of equity or less, or a vehicle with equity at $5,000 or less.
- Assets are auctioned off if applicable, and then the remains distributed to your creditors in a particular order.
- You cannot be a director of a company (i.e. you can’t have a corporation or lead one) or obtain credit while you’re bankrupt.
- For 9-21 months, you’re bankrupt. Income in excess of $2,200/month is 50% taken away and paid to the creditors.
- You’ll have to go to mandatory debt counselling and have your finances monitored aggressively.
- After 9-21 months, you’re discharged from all debts given you’ve done what you’re supposed to do. Now you’re set free.
- For 7 years after: your credit is crushed. This becomes 14 years if you’ve went bankrupt before.
- There is also a permanent public record of you filing for bankruptcy. Some jobs don’t hire anyone who has gone bankrupt, such as becoming an insolvency trustee (Haha), a “responsible” lawyer or accountant, and other odd positions of high financial responsibility.
- Trustee charges a fee equal to some government-mandated amount.

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For your salary, your take home would be around $5,900/month. For $14,000 of bad debt:

If the creditors go to collections: with a 25% contingency rate, they’d see $10,500 net. That’s if they get it.

If they sue you: Approx. $7,000+ of legal fees spent to file, if you dispute it at court. Assuming that the court awards them 35% of legal fees (usually it’s about up to 30-40%), they’d still expect $11,500. But if you don’t have the money then you’d just make their lives miserable.

If you offered them $7,000 to settle: they’d think about alternatively spending $7,000+ in legal fees to chase you to get your $7,000. This plus paying their staff to harass you almost if not equal to a daily basis. Probably not worth it so you have a chance. Just make sure you read all the fine print to make sure you’re released from any future liabilities related to this debt.

Orderly payment of debt program: you can get the interest reduced to 0% and make payments of $233.33/mo. for 5 years. But your credit is shot for a total of 7 years; less if you pay it off sooner; 4.5 years if you pay it off over 2 years instead.

If you just kept making the min. monthly payments of about 3% of the balance each month ($420/Mo.) at 22% APR, you’d pay $7,836 of interest by the time it’s finally gone... 4 years. This assumes you don’t get dinged for late payments.
So, the orderly payment of debt program may work for you if you don’t expect to need good credit for 2 years + however many years you want to take to pay off the balance, up to 5.
If you’ve been budgeting the minimum payments fine, then at $420/Mo. You could get rid of the $14,000 in 33 1/3 months.

Consumer Proposal: likely won’t work, as creditors will rather see you go bankrupt, unless you lost your income.
$(5900-2200)/2 = $1,850/mo.: you’d have to pay back for 9-21 months. Even at 9 months $16,650 of your income would be used to pay down the debt.

pcns11 wrote: ↑ Additionally, I had a few co-signed business loans with family that they paid off for me as they were not covered by my bankruptcy. Last year, the family member asked for the money back as there were some health issues. I wasn't able to qualify for a traditional loan, so I used the high interest predators to get them $20000 to pay off what I owed to them.

I have a stable annual salary of $98500 and have been on the road to re-establishing my credit. Transunion is at 655 and Equifax is around 640. I have 2 credit cards (capital one and triangle, both usually paid off monthly) and two high interest loans. I've gotten the loans down to about $14k but would love to consolidate them to a lower interest loan/loc to pay them off quicker.

Financial Karma comes to mind. It seems that you had a $20K interest free loan for a period of time.
$98.5K income and $14K debt will not get a lot of sympathy and may indicate you have some wiggle room in your budget.

That said, it sounds like you can pay off the predatory loans early potentially saving interest. If so, take the one with the highest interest first and pay it down as fast as you can while maintaining payments on the other. If they are both at the same rate, pay off the smallest one first for a psychological boost.

ROYinTO wrote: ↑ Financial Karma comes to mind. It seems that you had a $20K interest free loan for a period of time.
$98.5K income and $14K debt will not get a lot of sympathy and may indicate you have some wiggle room in your budget.

That said, it sounds like you can pay off the predatory loans early potentially saving interest. If so, take the one with the highest interest first and pay it down as fast as you can while maintaining payments on the other. If they are both at the same rate, pay off the smallest one first for a psychological boost.

Hi,

Thanks for the reply. It was a very complicated situation, and it was certainly not an interest free loan. I had been making monthly payments on the family loan since 2013, however the remaining balance was needed in a lump sum last year. I am also not asking for sympathy.

The ask is if anyone has had success using a credit union to consolidate loans that currently have 47% interest. I have been making additional payments on both loans (pretty much equal balance, equal interest rates) since I took them out, but was hoping for a better product, so the loans are paid off quicker. I do appreciate your time and advice though.

pcns11 wrote: ↑ Hi,

Thanks for the reply. It was a very complicated situation, and it was certainly not an interest free loan. I had been making monthly payments on the family loan since 2013, however the remaining balance was needed in a lump sum last year. I am also not asking for sympathy.

The ask is if anyone has had success using a credit union to consolidate loans that currently have 47% interest. I have been making additional payments on both loans (pretty much equal balance, equal interest rates) since I took them out, but was hoping for a better product, so the loans are paid off quicker. I do appreciate your time and advice though.

Lots of people have had success consolidating high interest loans with CUs and other banks too... Not sure what kind of feedback you're looking for here.

Make the appointment and speak with someone who can actually help.