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August 08, 2018 | By: Connie Cossio

How to Know if Filing for Bankruptcy is the Right Decision

Bankruptcy | Consumer Proposals

"I have to declare bankruptcy!"

I can't tell you how many times I've heard clients say this to me as they walk into my office. Everyone thinks their own financial situation is the absolute worst case ever — 99.99% of the time, it's not and that they have no other option but to file for bankruptcy. Sometimes that might be the case, but either way, it's important to understand when to consider bankruptcy and who to go to for help. 

Sometimes Bankruptcy is the Best Solution to Become Debt-free

I’ve spoken with many people who have tried for years to make good on their debts. This can include taking on a second or third job, selling their belongings, and/or living on just the bare necessities. But despite trying all of these different strategies, they just can't seem to make ends meet. In cases like these, bankruptcy may be a viable option to consider in order to become debt-free. But it's important to make sure you've explored all other debt solutions available to you. 

When to Consider Bankruptcy as an Option

If you are seriously considering filing for bankruptcy, you will need to work with a Licensed Insolvency Trustee (LIT), such as MNP LTD. There are various reasons why a person might want to consider bankruptcy as an option for resolving their problem debt. This includes:  

After experiencing a major loss of income

If someone has lost their job, or they have significantly less household income to manage their bill payments and other monthly expenses, they will likely have little-to-no money to pay off their debts. In this case, debt repayment can be extremely difficult if not impossible. In some instances, a person can negotiate with each of their creditors to extend the time they have to pay back their debts; however, this may not always be possible. Also, sometimes extending the time people have to pay off their debts offers little help.

Making debt payments but getting nowhere

There are many instances where people are making monthly payments toward their debt but it never seems to go away, and their outstanding debt just keeps getting bigger and bigger. In cases like these, managing debt can be overwhelming and costs too much to maintain due to mounting interest charges. Also, the mental stress that comes with managing numerous debts with little income can simply be too much for someone to handle on their own.

Depending on credit to make ends meet

Sometimes the cost of debt is so high there is no money left over to cover everyday expenses, so a person has to rely on credit cards to purchase gas, groceries, and other basic necessities. If a person is consistently depending on credit to make up for income they don't have, they will inevitably be in perpetual debt with no end in sight.

Reaching your borrowing limit

If you've reached your borrowing limit and lenders will not provide any further financial assistance or extend additional credit, you may have no other choice but to consider bankruptcy. If this is the case, it's important to explore all debt relief options available to you based on your current financial situation.

Alternative Debt Solutions to Bankruptcy

Many of these challenges can be resolved through an option other than bankruptcy, such as debt consolidation or even filing a consumer proposal, which is another form of insolvency. Let's take a look at how these other options might measure up to someone considering bankruptcy.

Using a Debt Consolidation Loan to Pay Off Multiple Debts

Acquired through a bank, credit union, or finance company, a debt consolidation loan can be used to pay off numerous debts, so that only one monthly payment needs to be made to the loaning institution (and hopefully at a lower interest rate). However, to obtain a debt consolidation loan you must have a good credit score, which few people in serious debt do, making this option unlikely.

Paying Off Debt Through a Debt Consolidation Program

A Debt Consolidation Program (DCP) involves rolling all your unsecured debts into one monthly payment through a non-profit credit counselling agency, like Credit Canada. A certified Credit Counsellor will work with your creditors to help you pay off your debts over time (usually between 3-5 years), and reduce or stop the interest on your debts. However, some creditors might not agree to the terms or stop the interest, or they may reject the proposal altogether. In other cases, a client might not be able to afford the monthly payment, so they wouldn't qualify for a DCP.

Filing a Consumer Proposal to Pay Off Debt

A consumer proposal is a form of insolvency that requires you to pay your creditors a portion of what you owe them within a certain period of time. This means you will still need some form of income to make the monthly payments on a consumer proposal. Unfortunately, that just might not be possible for many people struggling with debt.

In order to file a consumer proposal, you must work with a Licensed Insolvency Trustee (LIT). Consumer proposals are also legally binding, so defaulting on one will result in legal action that could make a bad situation worse.

Drop the Shame of Bankruptcy

There is no shame in declaring bankruptcy, especially if all other options have been exhausted. People in debt and those declaring bankruptcy come from all walks of life, and all economic and educational backgrounds. Declaring bankruptcy doesn't make you a bad person and it doesn't mean you're a failure. What it does mean is that your credit rating and score will need some time to recuperate, which can impact your ability to get a loan, credit, a mortgage, and in some cases, even a job.

Credit Canada Can Help You Find the Right Debt Solution for You

If you think bankruptcy is still an option you'd like to explore, you can speak to an unbiased professional about it, like a certified Credit Counsellor. At Credit Canada, we never judge, and we’re here to help you. If you’re struggling financially and have tried everything to get yourself back on your feet without success, let’s talk. Call us at 1.800.267.2272. All of our counselling is completely free and confidential, and you can choose whatever option makes the most sense for you. There's absolutely no obligation.

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