Not since the recession of 2008 has our country been in such dire financial straits. According to the Toronto Star, Canadians are filing for insolvency in record numbers, with the Government of Canada revealing that insolvencies totaled 35,155 in the final three months of 2019, the most in any one quarter since 2010. And that’s not all. According to one study, 46% of Canadians are within $200 of facing insolvency every month, up from 40% in the previous quarter.
Now, while it may seem like everyone is filing for bankruptcy, it doesn’t mean you should, too. Fortunately, there are other options available to you before you decide to take that kind of a financial plunge. In this blog, we offer some information about bankruptcy, its impact on your finances, and some alternative debt relief options.
What is Bankruptcy?
Bankruptcy is a legal process administered by a Licensed Insolvency Trustee (LIT), formerly known as a licensed bankruptcy trustee. The LIT, who is licensed by the government, will tell you how to file for bankruptcy in Canada during what is usually a free consultation. They will talk to you about the bankruptcy process, what debts you may still have to pay, what assets you may be able to keep, how long you will be considered bankrupt, and other ways the decision can impact your life – and lifestyle.
Of course, the ultimate goal for those declaring bankruptcy is to receive the coveted “bankruptcy discharge” which is obtained after successfully completing the bankruptcy process. This bankruptcy discharge releases a debtor from most types of debt.
Six Reasons to Avoid Filing Bankruptcy
If you’re deep in debt, you might be thinking bankruptcy is a great way to get out from underneath – a clean slate, so to speak. And while bankruptcy may be the best option for some people, there are a number of reasons why you should avoid filing for bankruptcy, unless of course you and an unbiased financial expert determine you simply have no other choice.
1. Impact on Your Credit Rating
While most people considering bankruptcy already have bad credit, it’s often not irreparable. Declaring bankruptcy, however, will drop it to an R9 rating – the lowest rating there is – for the duration of the bankruptcy period plus an additional six years following bankruptcy discharge.
2. Potential Loss of Assets
If you own valuable assets, like properties, cars, investments, etc., you may need to say goodbye to them. While there are exemptions as to what assets can and cannot be seized during the bankruptcy process depending on the province or territory you live in, non-exempt items will have to be surrendered to the LIT who will sell them and distribute the funds collected from the sale to your creditors. The LIT does have options as to how assets are sold and funds allocated, but this of course should be discussed with an LIT.
3. Immigration Delays
While you are completing an undischarged bankruptcy (or in other words, you are considered an undischarged bankrupt) you cannot act as a sponsor to bring a family member or loved one into the country.
4. Personal Loan Denials
If you have a mortgage when you declare bankruptcy, as a secured asset you will generally be able to keep it as long as you continue to make payments on it. But you won’t have any luck obtaining a mortgage while you’re on an undischarged bankruptcy. (Under the Bankruptcy and Insolvency Act, a bankrupt requesting credit over a certain amount must provide proof the lender knows they are undischarged.) Following discharge, options may be extremely limited until you rebuild your credit.
5. Business Loan Denials
Running your own business? Well, you may not be able to obtain business loans once you’ve filed for bankruptcy. It really depends on the situation and the decision is ultimately up to the lender. Some lenders may give you a business loan if, for example, you declared personal bankruptcy due to a medical situation that left you broke. But if you filed a business bankruptcy because you overextended your resources, they may not be too sympathetic.
6. Potential Impact on Career
It's illegal for a company to fire you for declaring bankruptcy; however, it is NOT illegal for them to not hire you if you have a bankruptcy on record, and today, many employers are doing credit checks before hiring. Eliminating applicants with bankruptcies is an easy way to weed through hundreds of applications. Having bankruptcies on your record can be especially detrimental for those working in banking, insurance, and real estate industries.
So while bankruptcy might be the best or only option for some individuals, there are still a multitude of reasons to consider avoiding bankruptcy. So what are some of your options instead of bankruptcy?
How to Avoid Filing Bankruptcy
In a previous blog, we highlighted ten ways to relieve yourself of debt without declaring bankruptcy. (You can check out the full story here.) Here are those ten items listed very briefly below, which are options you might want to consider first before resorting to bankruptcy:
1. Negotiate with Creditors
They may be willing to settle for significantly less than you owe if they know you’re considering bankruptcy, which may likely result in them receiving nothing.
2. Liquidate Some Assets
Sell some valuables (jewelry, electronics, stocks, even a car) and put the money toward debt.
3. Get Help from Family or Friends
Always a touchy subject, but if done the right way with a payback plan in place so that you’re not asking for a handout, it definitely beats filing for bankruptcy.
4. Pick up a Part-Time Job or Side Gig
Whether it’s bagging groceries part-time or driving an Uber on your own time, you can put the extra cash toward your debt.
5. Consolidate Debt into Your Mortgage
Rolling high-interest debt into a refinanced, low-interest mortgage could save you hundreds per month if your credit is in good standing.
6. Take out a Home Equity Line of Credit (HELOC)
If you can obtain a low-interest home equity line of credit (HELOC), you may want to consider to borrow against your home. Your credit doesn’t even have to be all that great because your home is used as collateral. But whatever you do, DO NOT default on your payments, or you'll risk losing your home. If you're considering a HELOC, be sure to speak to an unbiased professional first to make sure you're not putting yourself in a more difficult or vulnerable financial situation.
7. Dip into Retirement Funds
Planning for your future is important, but if borrowing some funds now can significantly benefit your situation, it’s worth speaking to a professional about it.
8. Take out a Debt Consolidation Loan
If your credit is good, you may be able to get a debt consolidation loan to pay all your debts off. Then you'll only have to make payments on the new, lower-interest loan, as long as you don't continue to use your credit cards and other credit products.
9. Enter a Debt Consolidation Program
Work with a certified Credit Counsellor from a not-for-profit credit counselling agency, like Credit Canada, who will negotiate with your creditors to reduce or stop the interest on your debts, rolling them together into one easy (and lower) monthly payment. You will also have a set completion date that you'll be debt-free by.
10. Consider a Consumer Proposal
Another form of insolvency are consumer proposals which involve paying your creditors a portion of what you owe, while avoiding some of the six big downsides of bankruptcy. LITs handle consumer proposals too, so if you're considering bankruptcy, ask an LIT if a consumer proposal might be an option for you instead.
Get Debt Relief Today
At Credit Canada, we’ve counselled thousands of Canadians considering insolvency, and helped them avoid bankruptcy simply through better money management and a little insider information. This includes budgeting and watching how and where you spend your money. You can do this online with our free, downloadable Budget Planner + Expense Tracker – it’s easy to use and the instructions are included in the spreadsheet.
Of course, we understand that you may feel your situation has gone way beyond budgeting help. In these cases, a Debt Consolidation Program may be a great option, and you don’t need good credit to qualify. All you need to focus on is making your new, lower monthly payment every month on time. The entire program can be completed in as little as two years, and after you've completed the program, your certified Credit Counsellor can give you tips on how to rebuild your credit.
Contact us today at 1.800.267.2272 to book a free and confidential counselling session and learn how we may be able to help you!