In our modern world, almost everyone has some access to credit - from credit cards and personal loans to overdrafts, installment loans, and much more. But getting rid of that debt can sometimes 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 realizeto 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 good 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 consider is refinancing through a debt consolidation loan. A debt 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 debt 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! That means stop using your credit cards, lines of credit, etc. Otherwise, your financial situation could become much worse.
If you are already behind with payments to one or more creditors, it's 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.
But What if Your Credit is Already Bad?
If you’re behind on any debt payments, or you’re still current but don’t have the ability to stay current much longer, you’re already in trouble. The only way it’s ever going to get better is if you deal with your creditors, either on your own or through an organization representing you.
Debt Consolidation Program
Reduces or stops interest charges
Partial debt repayment
Federal court procedure
Before You Claim Bankruptcy
Here are a few options to look into before seriously considering bankruptcy.
A Debt Consolidation Program
If you are able to pay off your debt entirely, but with the interest reduced or stopped, then one option is a or DCP. This is normally handled by a Credit Counsellor from a non-profit credit counselling agency 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 Licensed Insolvency Trustee (LIT). The LIT 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 LIT, 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 funds they are going to get back.
Bankruptcy - Your Last Option
For those who just don’t have any other options, there is bankruptcy. This is handled by a Licensed Insolvency Trustee (LIT). If a debtor is able to file a consumer proposal, the LIT will explain this option in detail to the debtor.
But for some debtors, there is no other option, which is why bankruptcy is sometimes referred to as the last option. Some reasons why you may want to avoid bankruptcy include:
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've filed for bankruptcy before and need to file again, it can be extremely difficult to re-establish your credit. Thankfully, bankruptcy is not the only avenue for dealing with problem debt.
Bottom line? Bankruptcy should be seen as an option when all other debt solutions have been exhausted.