How to Prevent and Avoid Bankruptcy and Still Get Out of Debt
Only 10% of our clients at BankruptcyCanada.com qualify to file for bankruptcy.
Among those, many would prefer to avoid going through the bankruptcy process, which is why licensed insolvency trustees provide a full assessment of your financial situation.
We understand that for a lot of people, the term bankruptcy is often associated with negative feelings, even though filing for bankruptcy helps people rebuild their financial stability.
Bankruptcy is a trustee-administered debt relief plan that obtains forgiveness for unsecured debts.
Therefore, for a first-time filing, you could become debt-free in as little as 9 months.
However, depending on your career objectives or your financial goals, bankruptcy may not be the best option to recover from debt.
Some of our clients prefer to find out how to prevent and avoid bankruptcy and still get out of debt.
Is bankruptcy an option for you?
You may not have to worry about how bankruptcy would impact your professional career or your credit rating if you don’t meet the eligibility criteria in the first place.
Indeed, during your first consultation with a trustee, we will evaluate your situation to define how to help you with debt relief.
To be eligible for bankruptcy, you need to criteria set in the Bankruptcy & Insolvency Act in Canada:
- You need to owe at less $1,000 in unsecured debts;
- You are unable to pay off your debts on time;
- The value of your assets if you sold them should be inferior to the amount of money you owe your creditors;
- You need to be a Canadian resident.
Some debts are not dischargeable through bankruptcy.
For instance, debts that are secured with collaterals are not covered by the bankruptcy process.
Additionally, some unsecured debts, such as student loans that are less than 7-year-old or court fines, cannot be part of your bankruptcy filing.
Consequently, you may not owe enough in unsecured debts to file for bankruptcy.
If you own valuable assets or your household has surplus income that you want to retain, the bankruptcy process is not an option that your trustee will recommend.
What are the most common alternatives to bankruptcy?
If you seek a debt relief program that can obtain debt forgiveness and stops creditors’ actions, including legal actions, trustees can administer another legally-binding process called the consumer proposal.
The consumer proposal also lets you settle unsecured debts of $10,000 or over.
However, unlike personal bankruptcy, when you file a consumer proposal, you need to repay partially your debt over up to 5 years, after which the debt is cancelled.
Your trustee can negotiate debt reduction by up to 80% depending on the nature and age of the debt, making repayment more manageable for debtors.
Additionally, a consumer proposal means you are not insolvent.
Therefore, it doesn’t affect career paths that require credit checks.
You don’t lose your assets through a consumer proposal, which makes it a valuable alternative when debts become too overwhelming.
A credit counselling option suggests a repayment plan that is negotiated by a credit counsellor with your creditors.
In this debt management program, you will repay your debt in full.
However, creditors agree to waive interest rates, which can provide sufficient financial breathing room for debtors.
Unfortunately, credit counselling is not a legally-binding process, which means that you will need the approval of all creditors to get on with the repayment schedule.
Some creditors are not open to negotiations.
You can also reach out to your creditors to discuss a debt settlement solution.
You can choose to negotiate your debt settlement alone, or you can contract a debt settlement company to act on your behalf.
Debt settlement companies are likely to charge you for their services, even if they don’t reach an agreement on the settlement plan.
In a typical debt settlement strategy, you will negotiate a debt reduction, both in amount and interest rates.
Can I borrow the money to avoid bankruptcy?
Our trustees don’t always recommend borrowing money to recover from your debts.
Indeed, while the process can let you pay off your debts rapidly, it creates new debts that may be difficult to manage.
From debtors who retain a good credit rating and have assets, a debt consolidation loan from a bank can help regain financial stability.
If your loan application is accepted, you can repay your debts at once, and pay off your loan at a low-interest rate in due time.
Some debtors consider borrowing from friends and relatives.
It could put you in a tricky position if you can’t afford to pay them back.
Additionally, if you ask your family to act as co-signer on a loan, you jeopardize their financial situation if you don’t repay it.
For small debts, it can be a good idea, but when the debt is substantial, you may poison your relationship.
Payday loans can seem like a suitable solution to pay off debts quickly.
However, you need to remember that most payday loan companies are aggressive creditors who charge huge interest rates – over 400%.
Due to the nature of the business, they are less open to negotiations, settlements, or delays.
Payday loan debts can be a source of anxiety.
Can I reduce my debts?
We believe that the first step to avoiding bankruptcy is to tackle your money issues.
Reducing the amount of money you owe can make debts more manageable and help you find a path to debt freedom.
With the help of a trustee, you can evaluate your budget and understand how to make the most of it.
Our experts have often noticed that clients can avoid becoming insolvent if they manage their budget more effectively.
Indeed, identifying areas where you can safely cut expenses without depriving your households of essential items and services can make a huge difference.
You can also consider temporary or permanent solutions to boost your income, for instance, finding a second source of income.
You could also sell some of your assets to pay off debts faster.
More often than not, you can save money on debt repayment by doubling up on payments to reduce interest rates in the long term.
If you are trying to avoid bankruptcy, we can help you rebuild your financial future safely with other debt relief solutions.
Get in touch to book an appointment with a trustee today!