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How to Avoid Bankruptcy

Almost everyone has some access to credit at some point in their lives. But once you've used it up, what's your plan for making the debt go away as quickly as possible?

Learn How

Consider Your Debt Situation

In our modern world, almost everyone has some access to credit in it's multiple forms - from credit cards and personal loans to overdrafts, installment plans and much more. Getting rid of that debt, sometimes can be a big problem.

How bad is your debt problem?

When debt gets out of hand and there's no plan to resolve it, that debt becomes problem debt. A lot of people in this situation automatically assume they have to file for bankruptcy. In reality, you might have more options than you realize to avoid bankruptcy. All you need is a good understanding of what you’re getting yourself into before you commit to any particular course of action.

First, you’ll need to make a list of which organizations you owe money to, how much you owe, what the interest rates are, and what payments are expected by the creditors. Most importantly, you’ll need to note whether you’re still current with your payments, or if you’ve already fallen behind.

How is your credit history?

Your credit is probably still "good" if you're making payments on time. If your credit is good then one option to look at is refinancing through a consolidation loan. A consolidation loan brings all your debts together under a single loan (with its own interest rate) and monthly payment. If you have multiple credit accounts, it may make your budgeting easier to have just one payment to manage. 

Refinancing is sometimes the answer, but the following two considerations are very important:

  • Is the interest rate on the consolidation loan lower than the debts you’re consolidating? If not, then you’re not accomplishing anything by consolidating.
  • Once you’ve cleared off your old accounts, you must stop using them!

If you are already behind with payments to one or more creditors, it is likely that your credit is now “bruised.” In this situation, you need to understand that the only way to avoid the “bad credit” label is to get current and stay current on your payments.

 

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But What if Your Credit is Already Bad?

If you’re behind with any payments, or if you’re still current but don’t have the ability to stay current any longer, you’re already in trouble, and the only way it’s ever going to get better is if you deal with your creditors, either on your own or with an organization representing you.

1

Debt Consolidation Program

Reduces or eliminates interest.

2

Consumer Proposal

Partial debt repayment

3

Bankruptcy

Federal court procedure

Before You Claim Bankruptcy

Here are a few options to look into before heading towards that dreaded last resort.

A Debt Consolidation Program

If you are able to pay off your debt entirely, but with the interest reduced or eliminated, then one option is the Debt Consolidation Program. This is normally handled by a credit counsellor, who will help you through a number of steps:

  • Develop a budget with bill payments you can afford.
  • Ask creditors to reduce your monthly debt payments to match what the budget indicates is affordable.
  • Administer the monthly payment coming from you, which goes into a secure, insured trust account, and pay this money out to your creditors.

At the end of a Debt Consolidation Program, all your debts will have been paid in full.

A Consumer Proposal

If you have the ability to pay a portion of your total debts, a Consumer Proposal is your next option. This is a legal proceeding under the Bankruptcy and Insolvency Act, and will be administered by a Bankruptcy Trustee. The trustee will have a preliminary consultation with you, and based on your budget, will determine what percent of your debt can be paid off over a period of time (maximum 5 years).

This percentage is what is proposed to your creditors in a Consumer Proposal. It is the trustee, and not you, who decides how much of the debt is payable based on your assets and income. Some people think that they can choose the number, but this isn’t true.

Creditors have the right to reject the proposal if they feel it isn’t enough, but most of the time, they are willing to accept the portion of the money they are going to get back.

Bankruptcy - Your Last Resort

For those who just don’t have any other options, there is bankruptcy. This is handled by a Bankruptcy trustee. If a debtor is able to file a Consumer Proposal, the trustee should encourage them to do so because filing for bankruptcy will be more complicated and it will have more of an impact on the debtor's future.

For some debtors, there is no other option, which is why bankruptcy is often referred to as the solution of last resort. 

  • Bankruptcy has the worst possible impact on your credit report.
  • It is the most difficult option in terms of re-establishing credit after the debts are discharged.
  • Some occupations prohibit filing for bankruptcy.
  • It will affect your ability to sponsor immigrants to Canada.
  • Your ability to retain some valued assets will be compromised.

If you have ever filed a bankruptcy in the past and you need to file again, the second time through it is likely you will be treated more harshly and it will be extremely difficult to re-establish credit.

Bottom line? Bankruptcy should be seen as a once-a-lifetime option, to be used only when there are no other available options. Bankruptcy is not the only avenue for dealing with problem debt.

Avoid Bankruptcy With a Free Debt Assessment

It's easy! Just fill out the form below and one of our credit counselling experts will contact you to begin discussing your personalized debt management options.

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