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 are distributed to your creditors. Consumer proposal is a great bankruptcy alternative if you have more debts than you can handle, but earn a stable income.
The Trustee will meet with you to determine if consumer proposal is right for you. As soon as the consumer proposal is filed, your creditors are prevented from taking you to court or garnishing your wages.
Creditors have 45 days to accept your proposal – and most proposals are accepted. Once accepted, a proposal is legally binding on all your creditors and stops all legal actions against you.
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 where they get some amount of money, rather than have you file for personal bankruptcy, in which case they will get little or nothing.
A consumer proposal can be better than bankruptcy for you, too. You usually get to keep your house and other assets. At the end of the proposal period, your debts are discharged, and your credit is not as badly affected as in a bankruptcy.
File for personal bankruptcy – get a fresh start
Bankruptcy in Canada is your final option. 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.
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 methods can be used against you, including wage garnishments or liens against property.
Your best bet to make things better is to act immediately.
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.
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