Many people considering debt restructuring first turn to debt consolidation loans and think of personal bankruptcy as a ‘last resort’. Here are four types of situations where filing a personal bankruptcy can actually be a better solution than a consolidation loan.
1. Your Credit History is Poor
- One major catch-22 of getting a consolidation loan to help manage debts is that many people find their credit score is too low to qualify for the loan. Others find that they owe too much to be able to consolidate via a traditional financial institution.
- If you have accounts that are overdue, missed payments, or even collection actions being taken against you, there’s a good chance your credit history won’t meet typical lender requirements for a loan.
Credit history and rating are not a factor in bankruptcy eligibility.
Some people may have ‘ideal’ credit history, while others may have low scores. In fact, as many as 70% of people who file for personal bankruptcy actually have excellent credit scores as they continue to make all of their minimum payments up until the point they declare bankruptcy.
2. You Have Few Assets
- Lenders often use a borrower’s assets as collateral or ‘security’ against consolidation loans, such as real estate or a vehicle. If you do not have sufficient assets to borrow against, most financial institutions will not be able to give you a consolidation loan.
Most people keep all their assets when they file personal bankruptcy, this is due to provincial exemption allowance laws. To see a summary of what can be retained in a personal bankruptcy, please click here.
3. Your Income is Uncertain
- If your income fluctuates considerably, is not documented, or is considered low by lenders’ standards this can impact your ability to be granted financing.
Much of the bankruptcy process is based on a person’s income.
If your income is low, this could mean a short bankruptcy term with minimal cost ($200 per month over the 9-month bankruptcy period).
4. Your Budget is Tapped Out
- Lenders may not specifically consider whether your living expenses leave enough money for you to comfortably repay your loan, but this is a key factor that you should consider before agreeing to any financing.
- While repayment terms on debt consolidation loans are usually lower than what it would cost you to pay all the separate debts each month, this often isn’t enough of a reduction to make the loan payments manageable in a household budget.
Because bankruptcy payments are based primarily on household income, your unique circumstances are taken into consideration. Furthermore, if you can repay some of your debt, you may be able to file a Consumer Proposal instead of a bankruptcy.
Uncertain if a consolidation loan or personal bankruptcy is the right choice for you? Meet with a Licensed Insolvency Trustee at Sands & Associates for a free debt consultation. We’ll discuss these and other debt management solutions, so you can get all the information needed to get a financial fresh start, debt-free.