It is possible that despite your best efforts you are in a difficult financial position. You have been unable to successfully raise monies to pay your creditors. Your efforts to improve your household’s cash flow position have not been as successful as you had hoped for. Furthermore, at the present time, the relevant limitation period has yet to expire in connection with one or more of your unsecured consumer debts. Finally, your efforts to make yourself “creditor proof” might not be sufficient to immunize you from your creditors.
You still have a number of strategies for dealing with your debt available to you. These include the following eight options:
- Making payment in full on one or more of your debts
- Obtaining a debt consolidation loan
- Making monthly payments
- Credit counselling
- Making a consumer proposal
- Settling your debt
- Doing absolutely nothing
- Adopting a wait-and-see approach
We are going to analyze these alternatives to bankruptcy by addressing the following five issues:
- Different debt categories and their importance
- Overview of bankruptcy alternatives
- When these bankruptcy alternatives are available
- How much does it cost to eliminate your debt using these bankruptcy alternatives
- Circumstances where a particular bankruptcy alternative might be ideal
1. Different debt categories and their importance
Not all debt is the same. Before you make a decision regarding which bankruptcy alternative might be best for you it is very helpful to develop a profile as to the type of debt that you have.
Secured debt: Secured debt is debt where the creditor has some asset or security that it can look to in the event of non-payment. The most common examples of secured debt in Canada is a lien arising from the lease or purchase of a car and a mortgage on real estate. If you don’t make your car payments the lender will typically be able to repossess the car because your lender has a security interest in the car.
Unsecured debt: Any debt which is not secured debt can be described as unsecured debt. If a debtor fails to make a payment on an unsecured debt then the unsecured creditor has no security it can look to for repayment of the debt. The creditor might make payment demands to the debtor or it might sue the debtor.
Unsecured consumer debt: Some, but not all, unsecured consumer debt can be described as unsecured consumer debt. This is debt which arises because of a consumer transaction. The most common forms of unsecured consumer debt are credit cards, lines of credit, overdraft protection, personal loans—but not student loans—as well as monies owing for firms providing phone service and internet services.
Monies owing to the government: Some unsecured debt is monies owing to the government. Compared with unsecured consumer debt, a debtor will have fewer options for trying to resolve monies owing to the government.
Non-dischargeable debt: There are certain types of debt which are not discharged, or forgiven, in a bankruptcy or a consumer proposal. These debts include child support and spousal support obligations. They also include student loans in circumstances where a person ceased attending school less than seven years ago. Government fines and civil judgments involving fraud are not discharged in a bankruptcy or consumer proposal.
Do not pay unsecured consumer debts which are more than six years old
Provincial governments in Canada regulate the conduct of credit reporting agencies such as Equifax and TransUnion. Under provincial law it is illegal for a derogatory note regarding an unpaid account to appear on your credit report more than six years from the date of your last payment. Therefore, if you have an unpaid account and the date of your last payment is more than six years ago then you receive no financial benefit from either making a payment in full or settling this account.
If you owe monies to the government, or if you have unpaid student loans, these debts are not extinguished because they do not appear on your credit report. Furthermore, you cannot take advantage of the expiry of a limitation period to avoid your obligation to repay a student loan or monies owing to the government.
Your Debt Profile
If you are going to be able to make intelligent decisions regarding bankruptcy alternatives then it is very important for you to understand not only the different categories of debt but also the amount of debt that you have in each category—both in dollar terms as well as a percentage of your total debt.
Your Debt Profile
|Debt Type||Amount Owing||Percentage of Total Debt|
|Unsecured Consumer Debt|
|Line of Credit|
|Line of Credit|
|Monies owing to Government|
|Student Loans (> 7 years old)|
|Student Loans (< 7 years old)|
|Civil judgments involving fraud|
To some extent your debt profile will affect not only which alternatives to bankruptcy are available to you but also which alternative or combination of alternatives might be the optimal choice for you.
- Most of the alternatives to bankruptcy canvassed below will not have any impact on your secured debt
- Credit counselling is only available with respect to unsecured consumer debt
- Settling your debt is limited to unsecured consumer debt and potentially some student loans
- You must include all of your unsecured debt in a consumer proposal—including monies owing to the government and student loans
- If you ceased attending school less than seven years prior to making a consumer proposal then your student loans will not be discharged under a consumer proposal
- If you have been sued then a consumer proposal might be attractive because it can prevent wage garnishments and having liens placed on your real property
2. Overview of bankruptcy alternatives
Obtaining a debt consolidation loan
A consolidation loan is a loan where you borrow money and the borrowed funds are used to pay off your existing debts. You then make payments over a period of time to pay off your consolidation loan. Conventional wisdom is that consumers should avoid obtaining a consolidation loan in circumstances where the interest rate on the loan is high. If you are able to borrow money at a low interest rate then it might make sense to borrow money to pay off your current indebtedness.
It is possible that you have so much debt and the repayment period will be so lengthy that you might simply be better off to stop paying your creditors. If you are eligible for a consumer proposal then the worse-case scenario is that you might be able to eliminate your current debt for somewhere around 30 to 40 cents on the dollar. There is a possibility that you could obtain an even better result
Making monthly payments
If you owe monies to a creditor there is nothing stopping you from making monthly payments to your creditor. I am not aware of any creditor in Canada that would refuse to accept a monthly payment from a creditor unless it were for some trivial amount. Under provincial law, collection agencies have a legal obligation to accept payments from a consumer, regardless of how small they are.
If you owe monies to your creditor then your creditor does have the right to sue you. Some creditors will be less inclined to sue a consumer if the consumer is making regular monthly payments. If you owe monies to the Federal Government or on an outstanding student loan then it might be prudent for you to consider making small monthly payments to your creditor.
Credit counselling is one option for dealing with unsecured consumer debt. If you make the decision to do credit counselling then you will enroll in a Debt Management Plan with a credit counselling agency. Credit counselling has a number of advantages. Firstly, it allows the consumer to reduce the amount of their monthly payments. Secondly, enrolling in a Debt Management Plan will stop collection calls from your unsecured consumer creditors. Finally, you might receive some relief in connection with the interest owing on your outstanding balance while you are in a Debt Management Plan.
Most Debt Management Plans are typically for four years although they can be shorter or a longer period. In a Debt Management Plan the credit counselling agency, in consultation with their client, makes a list of all the consumer’s unsecured consumer debt and totals the consumer’s indebtedness—100 per cent of the consumer’s total unsecured consumer debt. An additional amount, typically an amount equal to 10 percent of a consumer’s debt is added to this amount as fees to be paid to the credit counselling agency. This total is then divided by the number of months the consumer will be in a Debt Management Plan, to determine the amount of a consumer’s monthly payment under their Debt Management Plan.
A consumer proposal is a formal process, created under the federal Bankruptcy and Insolvency Act, where a consumer can make a proposal to his creditors in connection with all of his unsecured debt. It is very common for a person who makes a consumer proposal to be put in the position where they will repay about 35 percent of their outstanding unsecured debt.
In most instances, a debtor will repay this amount to their creditors over a period not to exceed five years by making monthly installment payments. If a consumer becomes more than 90 days in arrears making their payments under their consumer proposal then the consumer proposal will automatically be annulled. While the vast majority of people who make a consumer proposal make monthly payments to their creditors it is possible for a consumer to make a lump-sum payment to pay off their indebtedness arising from a consumer proposal.
In order to make a consumer proposal a consumer must meet with a Licensed Insolvency Trustee and provide details regarding their outstanding debts and the amounts owing to specific creditors. Creditors have the right to vote on a consumer proposal and to reject it.
Settling a Debt
A consumer proposal is a formal procedure, with specific rules determined by Parliament, under which a consumer can resolve all their unsecured debt. It is also possible for a consumer to settle a single unsecured consumer debt—and is some cases an unpaid student loan—through a very informal process of negotiation with their creditor, or its authorized collection agent.
If you have an unsecured consumer debt then there is a possibility that at some point your creditor might agree to accept a one-time lump sum payment from you that is substantially less than the current outstanding balance. As a general rule, creditors will not consider a discounted settlement unless no payment has been made on the account for a minimum of six months.
There are two scenarios in which a consumer will find themselves in a position to settle an account. Some consumers might make the conscious decision to stop making payments on one or more unsecured consumer debts—at about the same time– and once the accounts are more than six months old they will from time to time contact their creditors, or their authorized collection agent, to see whether or not an attractive settlement might be available. I will refer to this tactic as the pre-meditated debt settlement strategy. One of the advantages of the pre-meditated debt settlement strategy is all the accounts which the consumer stops making payments will reach the six month mark at about the same time
There are some consumers who simply reach a point where they are unable to make pay all of their financial obligations in a particular month and over a period of time one or more of their unsecured consumer accounts remains unpaid. At some point, with respect to one or more unsecured consumer accounts a Canadian will not have made a payment to a particular creditor for a minimum of six months. I will refer to someone in this position who wants to negotiate a discounted lump sum settlement as pursuing the accidental debt settlement strategy. Unlike someone who is employing a pre-meditated debt settlement strategy, the person who is using the accidental debt settlement strategy did not consciously plan to stop making payments to selected creditors.
It is beyond the scope of this article to explain the logistics of how debt settlement works. There are essentially three different ways that a consumer can take advantage of debt settlement. They can do it on their own. They can hire someone to mentor or coach them through the process which might involve a relatively small fee. Finally, they can hire a firm to do the negotiations on their behalf which could result in significantly higher fees.
Doing absolutely nothing
There are two reasons why you might not want to do anything in connection with an unpaid account:
- You are judgment proof
- You have not been sued in connection with one or more of your unsecured consumer debts
If you are judgment proof then doing nothing might be your best strategy when dealing with your creditors. A person is judgment proof when their creditors will not be able to recover any monies from them despite the fact that they have obtained a judgment against them.
If you do absolutely nothing then you might be putting yourself in a position where you are able to take advantage of the expiry of a limitation period on your debt—in which case you can avoid paying a penny to your creditor.
Adopting a wait-and-see approach
In many circumstances a consumer’s best strategy is adopt a wait-and-see approach. This involves the following:
- Making payments concerning the necessities of life
- Not making payments on selected unsecured consumer debt
- Making small monthly payments on delinquent student loans
- Making small monthly payments concerning monies owing to the government
There are two key advantages to the wait-and-see approach. Firstly, unlike many bankruptcy alternatives, it is a very flexible strategy which can potentially provide you with an opportunity to keep some or all of your bankruptcy options available. Secondly, the passage of time can be of tremendous assistance to someone struggling with unsecured consumer debt who adopts a wait-and-see approach. If one or more of your unsecured creditors does not sue you then the passage of time might be of tremendous benefit to you. Not only might you find yourself in a position where you can choose not to pay an unsecured consumer debt because of the expiry of a limitation period or, with time, you might be able to accumulate sufficient funds to negotiate a very favourable lump sum settlement.
A person needs to exercise some common sense when it comes to choosing which debts to stop making payments on. If you stop making your monthly rent payment on your apartment or your monthly mortgage payment at some point you will find yourself being removed from your residence. Similarly, if you stop making your car payments you car might be repossessed. If you stop making payments to your cell phone or internet service provider then these services are going to be cut off.
A consumer who adopts a wait-and-see-approach can take advantage of several bankruptcy alternatives at the same time. A consumer might decide not to make any payments with respect to one or more unsecured consumer debts—such as credit cards, personal loans, and lines of credit. If a consumer has outstanding student loans, he could make monthly payments on his student loans. These monthly payments could be the full monthly payment required each month or they could be for smaller amounts.
A consumer who adopts a wait-and-see approach can reassess their debt situation from time to time. If a person is sued then depending upon the circumstances they might be more inclined to make a consumer proposal or possibly negotiating a lump sum settlement.
3. When are these bankruptcy alternatives available?
In some circumstances these bankruptcy alternatives might not be available. The purpose of the following chart is to summarize when certain bankruptcy alternatives might not be available.
Circumstances where bankruptcy alternatives not available
|Bankruptcy Alternative||Circumstances where not available|
|Payment in full|
|Debt consolidation loan||Many debtors will not be in a position to obtain a consolidation loan due to their current financial situation.|
|Making monthly payments|
|Credit counselling||Some creditors might refuse to participate in credit counselling where they take the position that the debtor has sufficient assets—typically equity in a house in order to resolve their debts|
|Consumer proposal||Some debtors are not able to do a consumer proposal because they have too much equity in their house and they fail to meet the “insolvency test”.As a general rule, a consumer proposal will not be available where a debtor owes less than $10,000 to his unsecured creditors.Consumer proposals are not available where a consumer has more than $250,000 in debt, excluding mortgage debt|
|Settling your debt||There is no legal obligation on the part of a creditor to negotiate a settlement. Furthermore, settlements are virtually never available before a debt has been unpaid for a minimum of six months.|
4. How much does it cost to eliminate your debt using these bankruptcy alternatives?
Not all bankruptcy alternatives are created equal. Some of these debt resolution options are very expensive. Depending upon your situation, there might be opportunities for you to address your debt situation for a relatively small amount of money. If you are able to take advantage of the expiry of a limitation period with respect to an unsecured debt then you will be able to avoid paying a penny to a creditor with respect to that debt.
Cost of eliminating one dollar of your current debt
using various alternatives to bankruptcy
|Bankruptcy Alternative||Cost to eliminate one dollar of your debt|
|Payment in full||A minimum of 100 cents|
|Debt consolidation loan||Between 105 cents and 130 cents|
|Making monthly payments||Between 100 cents and 130 cents|
|Credit counselling||Between 110 cents and 130 cents|
|Consumer proposal||About 35 cents|
|Settling your debt||Anywhere between 20 cents and 100 cents|
|Doing nothing||Anywhere between 0 cents and 100 cents|
|Wait-and-see approach||Anywhere between 0 cents and 100 cents|
5. Circumstances where a particular bankruptcy option might be ideal
Payment in full
If you owe your creditors a relatively small amount of money then it might be in your best interests to try and make payment in full. By making payment in full you will likely be rehabilitating your credit score unless your debt is old. There is no incentive for you to pay an outstanding unsecured consumer debt where the date of your last payment is more than six years ago because this debt, by law, is not permitted to appear on your credit report.
Debt consolidation loan
A debt consolidation loan might make sense where you can borrow monies at a low interest rate and the amount of monies to be borrowed is not excessive. A debt consolidation loan might not be in a person’s best interests in circumstances where the amount of monies borrowed is substantial and the repayment period is more than five or six years.
Making monthly payments
If you are unable to pay monies to your creditors then in some circumstances it might be in your best interest to make small monthly payments to your creditors. This might be particularly true where you owe monies on a student loan or you owe monies to the government.
With respect to unsecured consumer debt, if you make small monthly payments to your creditors then you never be in a position to take advantage of the expiry of a limitation period to avoid paying a debt because the clock on a limitation period begins to run on the date of your last payment.
Credit counselling is an incredibly expensive method for eliminating one dollar of your debt. One could make the argument that 95 percent of the time that a person contemplating credit counselling would be better off doing one of the following:
- Doing absolutely nothing
- Making small monthly payments to their creditors
- Making a consumer proposal
- Attempting to settle their debt
There are two particular scenarios where credit counselling might be the optimal debt resolution option.
“Bridging solution where your student loans are less than seven years old”
If you have substantial student loans and you want these student loans discharged through either a consumer proposal or a bankruptcy—in circumstances where your student loans are not yet seven years old—then you might want to do credit counselling which will permit you to lower your monthly payments on your unsecured consumer debt until you reach the seven year mark at which time you can drop out of your Debt Management Plan and either do a consumer proposal or file for personal bankruptcy.
“Bridging solutions where you anticipate a major increase in your income”
If you are currently struggling with unsecured consumer debt but you anticipate a major improvement in your financial situation in the next six to 24 months then you might want to enrol in a Debt Management Plan with a credit counselling agency in order to lower your monthly payments. When your financial situation improves you will have the option of paying off your outstanding indebtedness at your earliest opportunity.
One of the key advantages of making a consumer proposal is that a person will be able to eliminate their unsecured debt for about 35 cents on the dollar provided they can repay the monies owing under the consumer proposal and they do not default in making their payments. Furthermore, it can be incredibly helpful where a person who has substantial equity in real property owned in their own name has been sued.
Circumstances where a consumer proposal is attractive
There are a number of circumstances where a consumer proposal might be attractive.
- To people with a high net worth
- To people who own real property in their own name with significant equity
- To people with substantial incomes
- To people whose wages are subject to garnishment
- To people who averse to taking risks
- To people who can borrow monies to fund a lump-sum payout
Circumstances where a consumer proposal might not be attractive
A consumer proposal might not be attractive to some people
- Where they do not have a regular income (and they cannot fund a lump-sum payout)
- Where they need access to credit
- Where it might have a negative impact on their employment
Settling your debt
Settling your debt might be an attractive option for people who have not been sued by their creditors. Settling debt might be an attractive option for people who can handle the stress associated with collection calls and the risk of a potential lawsuit. Finally, settling your debt might be an attractive option for people who live in a province where the limitation period is three years or less; two years in British Columbia, Alberta, Saskatchewan, Ontario, and New Brunswick, and three years for Quebec residents.
As noted earlier, if you are judgment proof then doing nothing might be your best strategy when dealing with your creditors. You are judgment proof if your creditors will not be able to recover any monies from you despite the fact that now, or at some future date, they cannot recover monies owing from you by taking advantage of enforcement remedies available to judgment creditors.
Doing nothing might also be a prudent strategy where you have not been sued by your creditors in connection with your unsecured consumer debts.
The wait-and-see approach might be attractive for individuals who owe monies to their creditors who have yet to be sued. Furthermore, It might be particularly attractive to individuals who do not have student loans or who do not owe any monies to the government.