Canadian bankruptcy rates have been abnormally high since the 2008 financial meltdown. Record consumer debt and a tight job market have made it easier than ever to get into debt. When you have reached the point that payments are only chipping away at accrued interest and you owe more than you could ever make, it may be time to call it quits.
Before filing for bankruptcy, however, there are some important factors to consider. Firstly, credit counselling is a required step in filing for personal bankruptcy so the sooner you consult a professional, the easier it will be to get back on track. The first consultation is often free and fees charged by trustees are regulated by the federal government.
A credit counsellor can not only help you file if you come to a mutual agreement that it is the only option available but can also suggest a number of other options based on how much you owe and how much you earn. Bankruptcy is a last resort only and borrowers should explore all other choices before filing.
Counsellors with the assistance of the licenced trustee they work with, are able to negotiate government regulated consolidation which is also known as a consumer proposals. Remember, it is in the best interest of creditors to help you avoid bankruptcy as they would rather receive a reduced payment than little to none at all. In fact, the debt limit allowable for consumer proposals has been increased from $75 000 to $250 000 to help make it a more accessible option.
The three main alternatives to personal bankruptcy are a debt consolidation loan, a debt management plan, and a consumer proposal.
A debt consolidation loan is a loan from a bank or lending institution that will allow a borrower to pay off their high interest rate debts. This way the borrower has only one payment to make each month at a more reasonable and affordable interest rate. These loans can only include unsecured debts so they cannot be used for mortgages, car loans, or other debts that will not be erased by bankruptcy. Credit rating will not suffer as long as regular payments are made and the borrower does not continue to accrue debts they cannot pay. Home Equity lines of credit are also a good solution to pay off high interest rate credit cards as they typically have much lower interest rates and repayment terms are more flexible.
Debt management plans can include reduced interest rates as well depending on the willingness of your creditors. Not all creditors will be willing to accept the terms of a debt management plan and counsellors cannot force them to agree. These plans will not discharge your debts, you will still pay back the full amount in most cases, but you have an extended amount of time in which to make payments. A debt management plan will be noted in your credit report and fees for this service are not regulated by the federal government.
A consumer proposal is an offer made by a trustee on your behalf to your creditors and specifies a certain portion of the debt which will be repaid. If the creditors holding the majority of your debt accept the proposal, it will be legally binding for all unsecured debts. These proposals can last up to 5 years and do not require a liquidation of assets. The proposal will be noted on subsequent credit reports and fees for this service are regulated by the government.
The Truth about Bankruptcy
If none of these options are viable for your situation, you may be forced to declare bankruptcy. While personal bankruptcy is not an attractive prospect, it may not be as grim as you think. Many personal items are exempt from seizure depending on the province or territory in which you live, for a complete list of exempt possessions and assets on our website.
Student loans will not be wiped in many cases but bankruptcy law has recently changed to allow for debts older than 7 years to be erased upon filing for bankruptcy. Other secured loans such as car loans will also not be erased if you plan to continue to keep the asset.
The biggest costs are the fees required to cover administrative costs of filing, surplus income to repay based on government standards, and the loss or settlement of non-exempt assets such as inheritance or lottery winnings received during or prior to the period of bankruptcy.
Finally, it is important to note that filing will not affect the debts or credit rating of your spouse as long as they have not co-signed or acted as guarantor for any of your credit cards or accrued debts. However, also upon your filing their debts will not be erased.