When exploring debt solutions, the topic of bankruptcy often looms as a last resort—a financial decision to be taken when all other options have been exhausted. For those burdened with unmanageable debt, the thought of bankruptcy can be daunting. While bankruptcy is one option, there are some alternatives available to those facing financial hardship, and several factors will need to be considered before deciding whether bankruptcy is the right choice.
Bankruptcy is a federally regulated legal process, governed by the Bankruptcy and Insolvency Act (BIA). It provides individuals and businesses with a way to discharge their unsecured debts when they are unable to pay them off. When someone files for bankruptcy, their assets are assessed, and non-exempt assets may be sold by the bankruptcy trustee to repay a portion of the debt.
After completing the bankruptcy process, most of the unsecured debts are discharged, allowing a person to make a fresh start financially. However, bankruptcy also has significant consequences, including a negative impact on creditworthiness and the potential loss of assets.
While bankruptcy can provide a fresh start for those drowning in debt, it is often considered a last resort for several reasons.
Impact on Credit
Bankruptcy remains on your credit report for several years, making it challenging to secure new credit, loans, or mortgages during that time. This can affect your ability to buy a home, finance a vehicle, or even obtain credit cards.
While in bankruptcy, income can be severely limited. The bankrupt person is to make monthly reports to the bankruptcy trustee, in order to have their income monitored. If they earn over the prescribed amount, which tends to be too low to live on, the trustee is required to receive half of everything over the limit. The more a person earns while in bankruptcy, the more they pay. What is more, if one makes more than this low limit, their bankruptcy is extended to either 21 months, or 36 months. This can make for a very long, stressful, and financially challenging time.
In bankruptcy, non-exempt assets may be sold to repay creditors. Canadians value their homes, cars, and personal possessions, making the potential loss of assets a daunting prospect.
Certain professions and industries may scrutinize an individual’s financial history. Bankruptcy could potentially impact job opportunities in these fields.
Exploring Debt Relief Alternatives
Thankfully, people who owe money have access to various debt relief alternatives that can help them avoid bankruptcy. It’s essential to understand these options and consider them before making a final decision.
Debt consolidation involves combining multiple debts into a single, more manageable loan. This can reduce the overall interest rate and monthly payments, making it easier to repay debts over time. However, at the time of writing this article, interest rates on a prime rate consolidation loans are quiet high and for large loan amounts, the lender tends to want collateral.
A consumer proposal is a legally binding agreement between the consumer and the creditors. It allows for a potentially reduced debt amount, usually lower payment, and it does not bear any interest. A consumer proposal can be a powerful tool to avoid bankruptcy while still providing debt relief.
Credit counseling agencies provide valuable financial education, budgeting assistance, and some very basic debt management. These services can help individuals regain control of their finances and work toward becoming debt-free. Saying that; credit counseling seems to be best when the debt amount is quite low, and only if a consumer proposal is not viable.
Debt settlement involves negotiating with creditors to settle your debt for less than the total amount owed. While it can negatively impact credit scores, it may be a viable option for some individuals. A word of caution: debt settlement can have its pitfalls, and a consumer could end up in worse shape than when they began. All agreements with the creditor need to be in writing, for the protection of the consumer. It is important to remember this method only deals with one creditor at a time, so is not a wholesale solution.
Factors to Consider
When deciding whether bankruptcy should be a last resort, it’s essential to step back and consider the known variables. There are also the unknown variables of a bankruptcy. Things like getting a raise, overtime, vacation pay, bonuses, and even the potential of obtaining an inheritance, (and many more variables), can all make bankruptcy more expensive and longer.
Assess your current financial situation and stability. If you have a reliable income and the ability to make reasonable debt payments, alternatives to bankruptcy may be more suitable and might even cost you less overall, than a bankruptcy. Consider the assets you want to protect. If you have valuable assets you wish to keep, exploring alternatives to bankruptcy is essential, as bankruptcy may involve asset liquidation.
Examine the potential impact on your credit. While all debt relief solutions may have consequences for your credit score, bankruptcy typically has the most significant and long-lasting impact.