Deciding whether to file for bankruptcy is a significant decision that should be addressed with utmost seriousness. It’s crucial to analyze the advantages and disadvantages of bankruptcy and how they fit into your financial situation. Furthermore, you should explore all alternatives to bankruptcy to ensure it’s the most suitable solution for your needs.
This article aims to guide you through these essential considerations, helping you make an informed decision as you plan your financial future.
1. Evaluating the Pros and Cons of Bankruptcy
The idea of filing bankruptcy might raise some concerns due to its potential downsides. However, in many instances, the perceived negatives are counterbalanced by the benefits. The table below provides a basic overview of the pros and cons you need to take into account:
1.1 Benefits of Bankruptcy
Starting Over Financially
Being trapped in a cycle of debt can be exhausting and stressful. Constantly dealing with bills and receiving calls from creditors can be a significant source of anxiety. Achieving a fresh start through bankruptcy can lift this burden from your shoulders, allowing you to progress without the hindrance of overwhelming debt.
Though bankruptcy does cause some credit damage, it can halt the continuous damage you may be currently experiencing. This process allows you to start rebuilding your credit, rather than continually suffering penalties from missed payments and debt collections.
Clearing Most of Your Debts
Bankruptcy clears most unsecured debts (credit cards, lines of credit, personal loans, payday loans and tax debts), reducing the number of bills you have to worry about. This makes it easier for you to balance your budget. However, it’s important to note that some obligations, such as child or spousal support payments and certain court judgments, won’t be cleared. Student loans might be cleared in some cases, but only if you’ve been out of school for seven years or more.
Stopping Harassment from Creditors
Creditors and collectors can be notably aggressive when seeking payment. The fear of answering the phone or checking your mailbox can be alleviated by filing for bankruptcy. This is due to the ‘Stay of Proceedings’ that is issued when you file, which halts all collection attempts.
Protection from Wage Garnishment and Legal Actions
Along with stopping harassment from creditors, the automatic ‘Stay of Proceedings’ also halts other collection attempts, including wage garnishment and legal actions. These processes will be managed by your Licensed Insolvency Trustee (previously known as a bankruptcy trustee).
Possibility of Becoming Debt-Free in 9 Months
Most first-time bankruptcy filings are completed after nine months. If the trustee finds that you have surplus income (income above a certain threshold), the process can take up to 21 months. For anyone who has filed bankruptcy before, the second bankruptcy will take longer. If you fall below the surplus income threshold, it will take 24 months or 36 months if you’re above that threshold.
Learn more about the duration of bankruptcy»
1.2 Drawbacks of Bankruptcy
Damage to Credit
Filing bankruptcy results in an R9 notation on your credit report, which is the most damaging notation you can incur. This can significantly impact your credit score. However, this damage is not permanent. A first filing will only stay on your credit report for 6 years, while a second filing will stay for 14. While this may seem like a long time, it provides a clear end date when your credit will be free of any damage.
Possible Liquidation of Assets
Any assets that do not qualify for an exemption will be sold, and the proceeds will be used to repay your creditors. However, this doesn’t mean all your assets will be sold. Personal items, such as your clothing, household items, tools for work and even a car up to a certain value are exempt. Most savings in a Registered Retirement Savings Plan (RRSP), Registered Education Savings Plan (RESP), or pension are also protected. However, contributions made in the past 12 months will not be exempt.
Find specific exemptions in your province»
Costs Associated with Bankruptcy
Bankruptcy trustees (Licensed Insolvency Trustees) are compensated for overseeing your filing, and you are responsible for this compensation. You must pay the trustee a monthly base contribution cost, which averages $200 per month. If your income puts you above the surplus income threshold, you must also cover surplus income costs.
Understand the full cost of filing»
Requirement for Full Financial Disclosure
The Licensed Insolvency Trustee will help you complete a Statement of Affairs. This report details your income, assets, liabilities (debts), and certain financial transactions. The court and trustee will essentially have full knowledge of your financial life. During the bankruptcy process, you must submit tax documents and pay stubs to demonstrate your income. This allows the trustee to determine if you have surplus income.
Filing Becomes a Permanent Public Record
Your Licensed Insolvency Trustee will report the filing to the Office of the Superintendent of Bankruptcy. The filing becomes a permanent public record in Canada. However, for most people, the only people who will know you filed are your trustee and your creditors.
Know who can (and does) access this public record»
2. Exploring Alternatives to Bankruptcy
Now that you understand the pros and cons, it’s important to explore all bankruptcy alternatives before contacting a Licensed Insolvency Trustee. This includes:
- Debt consolidation.
- Credit counselling.
- Debt settlement.
- Consumer proposals.
Bankruptcy should be considered only after all other options have been exhausted. If you can get out of debt without the cost, credit damage, and public record of bankruptcy, then it’s in your best interest to do so.
Explore bankruptcy alternatives
2.1 Debt Consolidation
Debt consolidation, which involves taking out an unsecured personal loan to pay off your existing debts, is the first and best option to consider. This solution is only effective if:
- You have a good or excellent credit score to qualify for the loan at a lower interest rate.
- You can pay off all your existing debt with the loan amount for which you can qualify.
Most lenders only offer personal loans up to $50,000 unless you earn a high income ($150,000). If your unsecured debt exceeds that amount, consolidation may not be beneficial.
Furthermore, if you have bad credit, you may not get approved, or the interest rate may be too high. However, if you qualify and have the right financial situation, consolidation offers significant advantages over bankruptcy. It does not damage your credit and could even improve it.
See if consolidation is right for you»
2.2 Credit Counselling
If you are unable to consolidate on your own but can afford to repay everything you owe, then you may qualify for a debt management plan offered by a credit counselling agency. These nonprofit agencies exist to help consumers who have overextended themselves with credit cards and other unsecured debts.
A credit counsellor will conduct a basic review of your debts, credit, and budget to help you understand your options for relief. They help you find a monthly payment you can afford that will pay off all your debts in 60 payments or less.
Learn more about credit counselling»
2.3 Debt Settlement
If you can’t afford to repay everything you owe, then it may be time to consider getting out of debt for less than you owe, such as via debt settlement. With private debt settlement, you avoid the full financial disclosure required when you contact a Licensed Insolvency Trustee.
A private debt settlement company negotiates on your behalf to help you discharge for the lowest percentage possible. Debt settlement will damage your credit score, but unlike bankruptcy and consumer proposals, it does not become a public record.
Decide if settlement may be an option»
2.4 Consumer Proposal
The last option before bankruptcy is to file a consumer proposal. This option also allows you to get out of debt for less than you owe, but unlike settlement, it’s arranged through a Licensed Insolvency Trustee.
The trustee determines how much you can afford to pay, then they set up a payment plan with a term of up to 60 months. A consumer proposal is relatively expensive compared to other solutions. It does become a matter of public record like bankruptcy. However, the credit report notation is an R7 instead of R9, which remains on your report for only three years from the date of final discharge.
