Why You Should Reduce Your Debt so you can Avoid Bankruptcy
While bankruptcy is sometimes the only option, the vast bulk of indebted people should try to avoid it if they can.
Yes, it offers freedom from unsustainable debts, but it also comes with a host of long-term costs that can rumble on for many years.
It is not an entirely benign legal process.
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You Could Lose Some Of Your Assets
Canadian bankruptcy laws offer some asset protection.
Sometimes, creditors are within their legal rights to help themselves to property and equity you own.
Bankruptcy asset exemptions ensure that indebted individuals can keep the things they need to avoid severe poverty.
Thus, most provinces allow people to hold equity in their homes and vehicles up to a certain threshold.
Any money above these thresholds, however, can go to creditors.
And so if you are asset-rich, but cash-poor, you could find that bankruptcy diminishes your wealth significantly, depending on how much you owe.
You Might Not Get That Job You Want
Even though Canadian law offers certain protections, many employers perform background checks on their new hires to find out more about them.
Sometimes, you can’t stop a future employer obtaining this information, particularly if you apply for a role that entails financial responsibility.
Thus, filing for bankruptcy might seem like a prudent decision right now, but it could seriously hamper your capacity to get a promotion in the future.
You need to ask yourself whether the trade-off is worth it.
Should you get rid of your debts today, but deny yourself a higher income in the future?
It’s not always clear.
Often it makes more sense to find alternative means to clear the outstanding balance.
You Credit Score Will Crash
When you file for bankruptcy, it goes on your credit report.
Now that you’re bankrupt, you represent more of a risk to lenders.
You haven’t been able to pay your debts in the past, so there’s a higher chance you’ll also fail to do so.
Consequently, credit rating agencies will revise your score downward, making it more challenging to get a loan.
Canadian law states that bankruptcy must remain on your credit report for six years after discharge if it is your first bankruptcy.
If it is your second, then the wait for a clean sheet is even longer.
Six years is a long time to go without credit.
During this time, you may not be able to take out a loan on a vehicle or mortgage on a home.
Similarly, you may not be able to borrow money to start a business, missing out on opportunities to make money.
You Can Feel Stressed
Going through bankruptcy is a stressful experience.
It also comes with a social stigma.
Some people, therefore, might want to avoid bankruptcy to avoid feelings of shame and worthlessness.
If you’re considering bankruptcy, you should speak with a credit counsellor.
They can assess your current financial position and show you how to reduce your debts through alternative means.
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?