Debt Forgiveness vs
Consolidation Loans: What’s the Difference?


Debt Forgiveness vs Consolidation Loans in Canada

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Ever wondered what the difference is between a debt consolidation loan and debt forgiveness?  Never even heard of debt forgiveness?  You’ve come to the right place.  

Financial topics can feel intimidating and difficult to navigate and the way major financial institutions define things can sometimes leave us even more confused.  Let’s tackle two financial concepts today: consolidation loans and debt forgiveness.

What is a Debt Consolidation Loan?

A debt consolidation loan is a loan or line of credit that takes other loans, credit cards and debts and rolls them into one payment.  Essentially, it’s  borrowing money to pay off borrowed money.  With consolidation loans, you have a set interest rate and one payment rather than several payments to several debts with various interest rates. In most cases, you can keep your old credit or debts. In others, you’ll be required to close access to the old credit cards and debts.

Not all consolidation loans offer a better or lower interest rate. There are high interest rate lenders that specifically target people that may have bruised credit in the past. If you have ever been late on your debt payments or your debts are in collections at the time you’re searching for a solution, a high interest consolidation loan may seem like the only option. 

When you consolidate your debts, you’re paying off the full amount plus interest. To qualify for a consolidation loan, the lender will check your credit and want to know your income, expenses, assets and liabilities in order to assess the risk of lending money to you to pay off your other debts. Once approved, you’re bound by your contract with the lender to make your payments including interest and hopefully pay it off in full at some point.

With a debt consolidation loan, you are not required to work on your money mindset or behaviours, nor are you required to change your money habits. However, the responsibility is on you to avoid getting further into debt in the future.

With major banks and financial institutions, you can usually consolidate most credit card balances and lines of credit.  Student loan debt and other loans can sometimes be a little tricky, but some lenders can consolidate them as well.  

Impact on Credit Report

The debt consolidation loan provider will check your credit. This means there will be an additional inquiry on your credit report which may impact your score. The number of inquiries on your credit report have a 10% impact on your overall score. The consolidation loan will be visible on your credit report and making your monthly payments on time will be crucial. 

Your score may drop initially as you’ll have a high balance on a new loan, but as you pay down your debt, your credit score will improve. 

Pros of Debt Consolidation Loans

  • It’s good for highly disciplined people that won’t rack up credit again.
  • It may be good as part of an overall financial plan through a financial expert.
  • It’s a one-time option for taking advantage of a much lower interest rate and accelerating payments.
  • It has a short-term impact on your credit report.
  • It can  reduce your interest and assist to manage one payment instead of multiple payments each month.

Cons of Debt Consolidation Loans

  • It’s not good for individuals who lack discipline especially when using credit. 
  • It’s short-term relief from overwhelming and unmanageable debt rather than a permanent solution,
  • It’s not ideal for someone struggling to keep up with new consolidated payments.


Credit game chart


Before working with a credit consolidation company, do your research. Watch out for upfront fees, high interest rates and be sure to select a reputable company by checking them out on the Better Business Bureau, reading reviews and running it past your accredited and licensed financial professional.

What is Debt Forgiveness?

Having your lenders forgive the debt you owe them or a portion of it, is debt forgiveness.  There are two options for debt forgiveness in Alberta and Canada in general: Consumer Proposals and Bankruptcies. Both are only available through federally regulated Licensed Insolvency Trustees. 

In a debt forgiveness program, you only pay back a portion of your debts, not 100%, and there’s zero interest. It’s one monthly payment based on your budget and federal guidelines. It’s not a loan or a form of additional credit.  

To qualify for one of the debt forgiveness programs, you’ll have a consultation with the Licensed Insolvency Trustee firm, to gather information such as your income, expenses, assets and liabilities.  Student loans*, Canada Revenue Agency debt and all unsecured debt can be included in a debt forgiveness program. 

As part of the regulation, you’re required to attend two mandatory counselling sessions to help with money mindset and behaviours. You’re required to change some of your money habits and build new ones to help you avoid needing further debt forgiveness  in the future. Your old credit cards, loans and other unsecured debts will be closed out.  

Impact on Credit 

A consumer proposal remains on your credit report for either three years after completion OR six years from the file date whichever comes first. Bankruptcy shows on your credit report and remains for six years after you get discharged from bankruptcy if it is your first bankruptcy and 14 years for any bankruptcy after the first. 

Pros of Debt Forgiveness 

  • You only have to pay back a portion of what you owe rather than the full amount.
  • It can help you free up cash flow each month.
  • Zero interest and one payment per month rather than multiple.
  • It’s legally binding on creditors for your protection.
  • It can an provide immediate relief from creditor calls.
  • It’s good for individuals wanting to get out of the credit loop.

Cons of Debt Forgiveness  

  • It has an impact on your credit report.
  • It can make it difficult to qualify for additional credit at best rates and terms in the short-term.
  • I’s not good for those who are comfortably paying their debts monthly as they come due.


Before working with a debt forgiveness professional, do your research. Watch for up-front fees, high interest rates and be sure to select a reputable company by checking them out on the Better Business Bureau, reading reviews and running it past your accredited and licensed financial professional.

The biggest question is “Am I managing my debt payments as they come due?”  If not, then you need to assess your options. Consider debt forgiveness or debt consolidation through a realistic perspective: Understand  your strengths and weaknesses and choose the solution that has the best chance of being sustainable.  

Discuss your options with a Licensed Insolvency Trustee firm like Bromwich+Smith and never  sign into a program or loan in a rush, without ensuring the company you’re  working with is reputable. 

By Taz Rajan Community Engagement Partner at Bromwich+Smith
Taz has been in the finance industry for nearly 2 decades and has always been passionate about education and empowerment.  Having declared bankruptcy herself, she intimately understands the shame, stigma surrounding matters of debt as well as the joy and relief that comes from restructuring.  Taz actively works to normalize the conversation of debt through blogs, media interviews, webinars, lunch & learns and through building relationship.




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