How to Get Out of Debt: Bankruptcy and Alternatives to Bankruptcy
Can’t pay your bills? You’re not alone. Many Canadians reach this point at one time or another in their lives. In 2018 alone, 125,266 Canadian consumers filed insolvency claims (bankruptcies or proposals).
Thousands of consumers before you have experienced the following scenario: the bills get ahead of you and before long you are using lower interest credit cards to pay off your higher interest credit card debt, and borrowing from one account to pay off another. Then one day you realize: I’m in trouble and I need help figuring out how to get out of debt!
Your Options for Getting out of Debt in Canada
The good news is that there are several very good options available to you. These options have been used by millions of Canadians, and they work.
Learn better money management
Create a budget by listing all your monthly income and expenses. Analyze it to see if you can raise your income or lower your expenses. You might be surprised that when you put your income and expenses down in a list, you immediately see ways to economize without greatly impacting your lifestyle.
Realize that a lot of what you are buying may not be necessary. Don’t waste your money by giving in to impulse buying.
Once you have reduced your expenses, use the cash you have freed up to repay your debts. Get rid of most of your credit cards as soon as you can pay them off, so the temptation is removed. Keep a couple of credit cards and rebuild your credit rating by using them responsibly. This way, you’ll be able to get necessary credit more easily and at lower interest rates.
You can get free help with budgeting and other money management skills from a professional credit counsellor.
Get a bank loan for debt consolidation
If you qualify for a loan of this type, you can use it to replace your unsecured debts with a single debt consolidation loan account – with one monthly payment, a lower interest rate, and possibly a longer payment period.
If, like most people, much of your unsecured debt is in high-interest credit cards, the lower interest of the loan will make it much easier to get back in the black.
Construct a debt management plan with the help of a credit counsellor
A credit counsellor can help you build money management skills. Also, he or she may negotiate with your creditors to set up a debt management plan for you. A typical plan has a single monthly payment and lower interest costs, and is spread over up to four years.
Orderly Payment of Debts (if you live in Alberta, Saskatchewan, Prince Edward Island or Nova Scotia)
If you qualify to enter an Orderly Payment of Debts program, an arrangement will be made with your creditors so that you can make a single monthly payment geared to what you can afford. The Program provides lower interest costs, protection from legal actions, and extensive help to learn financial skills. It is available only in Alberta, Saskatchewan, PEI and Nova Scotia.
Consumer proposal – negotiate a payment plan with your creditors
A Licensed Insolvency Trustee can help you file a consumer proposal to your creditors, in which you make set payments you can afford for up to five years. These payments cover the amount paid to your creditors and the government-legislated Trustee fees. Consumer proposal is a practical bankruptcy alternative if you have more debts than you can handle but earn a stable income.
In most consumer proposals you pay only a portion of what you originally owed to your creditors, but they receive more than what they would receive if you filed for bankruptcy.
The Licensed Insolvency Trustee will meet with you to determine if a consumer proposal is right for you. The Trustee is fully qualified to describe other debt solutions as well. There will be no pressure on you to choose a certain course, but you will gain valuable information.
If you choose to file a consumer proposal, the Licensed Insolvency Trustee will work with you to determine your monthly income and expenses, and the value of your assets. All this information is important in filing a proposal that is fair to both you and your creditors, and will be accepted by your creditors. You typically will not lose your assets in a consumer proposal – that’s one of its advantages as opposed to filing for bankruptcy.
As soon as the consumer proposal is filed, a legal “Stay of Proceedings” applies to your debts – this means that your creditors are prevented from taking you to court or garnishing your wages. In fact, they may no longer legally contact you by phone, email or mail. From the time your consumer proposal is filed with the government, your creditors will deal directly with your Trustee.
Creditors have 45 days to accept your proposal – and most proposals are accepted. Once accepted, a proposal is legally binding on all your creditors.
In most consumer proposals you pay no further interest on your debts, and you may pay less than the full amount owing, depending on your resources.
Why do creditors accept most consumer proposals? Creditors would rather accept a deal in which they get some amount of money, rather than risking that you will file for personal bankruptcy, in which case they will receive little or nothing.
A consumer proposal can be better than bankruptcy for you, too. You usually get to keep your house and other assets.
The immediate effect on your credit score of filing a consumer proposal is similar to that of filing for bankruptcy – your score on your credit cards will move to an R7 or an R9 (typically the score moves to an R9 in both cases). However, keep in mind that if you have become insolvent, you may already have missed payments – so your credit rating may not have been good for some time.
At the end of the proposal period (typically five years), or once you have paid the full amount of the proposal (yes – you are allowed to pay it off early if your circumstances improve) your unsecured debts are discharged. Your creditors cannot legally ever approach you again for payment on these accounts.
File for personal bankruptcy – get a fresh start
Bankruptcy in Canada is a useful insolvency solution for situations that the other options cannot address. If you cannot pay even a significant fraction of what you owe, you can file for bankruptcy through a Licensed Insolvency Trustee. Bankruptcy is stressful, but represents a new financial start.
An advantage of a simple bankruptcy versus a consumer proposal is that the bankruptcy may last as little as nine months, versus a typical five years for a consumer proposal (although consumer proposals may be paid off early). If you earn income over a certain amount (“surplus income”), your bankruptcy may be longer – typically 21 months. For more information, see our page How Long Will I Be in Bankruptcy?
What About My Credit Score?
Some individuals worry that they will never be able to own a house if they have been bankrupt or filed a consumer proposal, but this is far from the truth. However, rebuilding your credit rating after bankruptcy or consumer proposal is an essential step before you will be granted credit again at a favourable rate.
After you are discharged from bankruptcy, or have received your Certificate of Completion for your consumer proposal, it is a good idea to let the credit bureaus (Equifax and TransUnion) know. Both credit bureaus will allow you to send them a copy of your documentation. However, even if you do not contact them, they will soon learn of your completion and will update their files.
Your credit score right after consumer proposal or bankruptcy is likely to be quite low – often in the high 400s.
Apply as soon as you can for a small amount of credit to start you on your way to a better credit rating. This may take the form of a secured credit card, a loan from your bank, or even a car loan. Make sure to maintain a perfect payment record on this new credit, and don’t use more of it than you can easily handle. Soon, your credit score will begin to rise!
The record of your bankruptcy or consumer proposal will eventually be erased from your credit report. See our page, When Does A Bankruptcy Clear from My Credit Report for more information.
What If I Just Stop Paying?
You may feel so overwhelmed that you simply stop paying your bills, and attempt to carry on this way. In this case, you will find yourself avoiding answering the phone, not opening your bills, and possibly feeling guilty. Of course, you know that avoiding your creditors will only make matters worse. You may be hoping for a windfall that stubbornly doesn’t arrive.
Here’s what happens if you stop paying:
- One payment missed: If you have a good borrowing history, your creditors may simply send you a polite reminder letter.
- Two payments missed: You will get a strongly worded letter, and possibly also a phone call, demanding payment.
- Three payments missed: Creditors may begin enlisting collection agencies to press you for payment. Collection agencies will make your life unpleasant, using a variety of pressure tactics to get the money.
If you still don’t pay, stronger (but still legal) methods can be used, and the creditor or collection agency may take legal action against you. This can lead to wage garnishments or liens against property.
If your creditor is the Canada Revenue Agency (CRA), note that the CRA can proceed with liens or garnishments without having to take you to court first.
Your best bet to make things better is to act immediately. You may have more options than you think!
Free consultation with a Licensed Insolvency Trustee
If you need some direction and advice on your options on how to get out of debt in Canada, we encourage you to contact a Licensed Insolvency Trustee. Licensed Insolvency Trustees offer free and confidential initial consultations and can help you in choosing the option that is right for you.
What to expect when you meet with a Licensed Insolvency Trustee
Licensed Insolvency Trustees are professionals licensed by the Federal government to deal with insolvency situations. They are the only professionals who can file your bankruptcy or consumer proposal paperwork with the government.
Licensed Insolvency Trustees undergo rigorous training, and many are also Accountants. They have a solid understanding of both the causes and solutions for insolvency.
When you meet with a Licensed Insolvency Trustee, you’ll find a professional who is not judgemental of your situation – they know that you did not intend to have debt problems! The Trustee is also aware that many companies and institutions that offer credit do so knowing that many of their customers will have trouble making their minimum payments. You are not alone! Your Trustee will understand.
In your first meeting, you will give the details of your situation to the Trustee, and you may also provide exact numbers if you have them on hand. The Trustee will also ask questions about your job and your monthly expenses.
With this information, the Trustee can explain options for moving into a better financial future. These may include some that we have described above: credit counselling, consumer proposal, perhaps personal bankruptcy. The Trustee can explain the pros and cons of each, and how they apply to your unique situation.
At the end of your first meeting, you can both decide whether to proceed with any one of these options. There is no obligation, but one guarantee: you will finish your free, first meeting with much more information than you had before.
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