Although many people considering debt restructuring solutions first turn to borrowing with debt consolidation loans and think of personal bankruptcy as a last resort, there are many situations where filing a personal bankruptcy – or consolidating without borrowing using a Consumer Proposal – can be a better solution for getting out of debt.
As Licensed Insolvency Trustees every year we help thousands of individuals and business owners get a plan to deal with their debts and achieve a financial fresh start. We’ve put together some information to help British Columbians better understand some of the considerations and general processes involved with getting debt help and evaluating potential debt management choices. Read on to learn about common indicators that bankruptcy may be your best debt option, and when a Consumer Proposal can be a better debt solution.
It is always best to discuss your specific situation with a qualified Licensed Insolvency Trustee or Insolvency Estate Manager directly – you can even connect with a Sands & Associates professional from the comfort of your home.
Assessing your Debts & Resources
There are several considerations Licensed Insolvency Trustees take into account when helping someone assess their financial situation and the options that might be most suitable to help them address their debts.
When you meet with a Licensed Insolvency Trustee or Insolvency Estate Manager, you could expect them to ask about the following:
- Why You’re Seeking Debt Help
- Do you have a specific issue we can help you with or goals you want to meet? For example:
- Consolidating your debt
- Finding a solution with a lower monthly payment
- Stopping a wage garnishment or collection action
- Being able to establish a target date to be “debt-free”
- Do you have a specific issue we can help you with or goals you want to meet? For example:
- Assessing Your Financial Situation
- Who do you owe money to, and around how much?
- Do you have income, if so, approximately how much?
- What is your household living situation? Do you have dependants etc.?
- What are some of your regular household expenses?
- Do you own any assets, if so, what are they?
Once we have a better idea as to your circumstances and any specific financial challenges you may be facing, we’ll discuss potential debt options together. Depending on your situation, you could have several viable choices to consider utilizing to get out of debt, including:
- Negotiating with your creditors informally
- Traditional debt consolidation
- Credit counselling programs
- Non-borrowing consolidation with a Consumer Proposal
- Personal bankruptcy
Use our Free Online Debt Options Calculator to Compare Payment Scenarios
“Is it Better to File Bankruptcy?”
Since no two situations are alike, there is no single definite answer to “when is bankruptcy best” – but there are a few factors that could indicate a bankruptcy may make sense as a solution for debt relief and a financial fresh start:
Your income is very low or uncertain
Income is a key factor to consider in virtually all debt options, whether you are attempting to qualify for a consolidation loan, repaying debts in a credit counselling plan, or filing bankruptcy:
- Much of the overall bankruptcy process (such as how much you will need to pay as well as how long your bankruptcy lasts) is based on a person’s take-home 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), as is the case with most bankruptcies.
- This is generally quicker and far less costly than repaying your debts in full.
- If your income fluctuates considerably, is not documented, or is considered low by lenders’ standards this can impact your ability to be granted financing through debt management solutions like consolidation loans.
- In some situations, if you are self-employed it can also be more challenging to demonstrate to a bank that you have the steady income required to pay back a consolidation loan.
- Because credit counselling programs require you to repay your debts in full, there is no opportunity to consider your monthly income into the overall payment requirements – this can result in credit counselling settlements being unaffordable for many people with a lower income.
You have few assets (if any)
Lenders often use a borrower’s assets such as real estate or a vehicle as collateral or ‘security’ against consolidation loans – many financial institutions will not extend you a consolidation loan if you do not have enough assets to borrow against.
- Even if you do have an asset that is acceptable as security, use caution before pledging any assets – or taking on a co-signer for financing. You may be giving your creditor access to an assets that would otherwise be protected, or risking your co-signer’s money and credit history in the event you are unable to maintain your payments.
- Unlike many people believe, co-signing a debt for another person means they are 100% responsible for the unpaid balance, not 50/50.
Although the assets that you have will be noted when assessing the option, most people keep all their assets when they file personal bankruptcy, due to provincial exemption allowance laws. These exemptions include provisions for assets including (but not limited to):
- Household goods, clothing, and medical aids
- A vehicle
- Home equity
- Tools of the trade
You may also continue with vehicle financing in place if you choose to declare bankruptcy or make a Consumer Proposal to your creditors. Vehicle loans or leases, as well as mortgages are treated differently than other creditors such as credit card lenders.
Your ability to repay a meaningful portion of your debt is unlikely
Although lenders may not specifically consider whether your household situation and living expenses leave enough money for you to comfortably repay your loan, 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 monthly payment amount is often still too high to make the loan payments manageable in already-stressed household budgets.
- In other cases, the total amount of debt owing may far outweigh a person’s income and ability to repay the debt. This often occurs in situations where the debt was unexpected (such as a large CRA balance or ICBC debts), or where a person’s circumstances changed drastically from when they took on the debt initially (job-loss, health issues, divorce or separation are common instances).
Because bankruptcy payments are based primarily on household income and not the overall amount of your total debt, your unique circumstances are taken into consideration. If your income is above a government-set threshold, you may repay a small portion of your debts in a bankruptcy, but this is generally far less than repaying the entire debt – with or without interest.
In situations where you can repay a portion of your debt, a Consumer Proposal may be an ideal solution that allows you to cut your debt, while avoiding filing bankruptcy.
“When is it Better to Make a Consumer Proposal?”
As with considering personal bankruptcy, no two situations are exactly alike – but in many cases where a person has some means of paying a manageable amount of their debt, Consumer Proposals can be a great option in a variety of circumstances – they are very flexible, tailored to each person’s circumstances.
A Consumer Proposal is not the same as bankruptcy, and provides an affordable alternative to other consolidation options including:
- Consolidations loans – which can be difficult to qualify for and have high monthly payments since you are repaying 100% of your debt, with ongoing interest.
- Credit counselling programs – which cannot deal with many types of debts and can also have higher monthly payments since you will repay 100% of your debt, with additional professional fees.
How Do Consumer Proposals Work?
Consumer Proposals are a unique type of legal debt consolidation that will allow you to combine virtually all types of debts into one (usually monthly) repayment plan, automatically stopping further interest. No borrowing is involved with a Consumer Proposal, and your creditors will be prohibited from contacting you for further payments or collection actions. Some points to know about Consumer Proposals:
- Consumer Proposals can consolidate a wide range of debts, from credit cards to CRA debt and more.
- Debts can often be cut substantially, making the total amount of debt that needs to be repaid as little as 20% of the total debt.
- Consumer Proposals are only available by working with a Licensed Insolvency Trustee.
- There is no additional cost or professional fees payable by the individual when making a Consumer Proposal.
- Consumer Proposal are almost always accepted by creditors, and only 50% of your creditors (by dollar value) need to agree to your plan in order for it to be legally binding on all of them.
A Licensed Insolvency Trustee can help you evaluate whether a Consumer Proposal could be your best solution to consolidate your debts and get a financial fresh start and will work with you to offer a suitable proposal to your creditors.
“Do I Qualify for Bankruptcy or a Consumer Proposal?”
To qualify for bankruptcy or making a Consumer Proposal in Canada you must be insolvent – this means that you need to:
- Owe at least $1,000, and
- Be unable to repay your debts as they become due, either because you are unable to make your payments as agreed, or because you owe more in debt than you own.
These “qualifiers” are very broad, which allows virtually anyone access to legal debt solutions should they find themselves needing help.
As outlined previously, there are many factors to consider in determining which debt management solution may be the best to deal with your debts – for example, just because a person is insolvent would not necessarily point to bankruptcy as the ideal option – and a Licensed Insolvency Trustee or Insolvency Estate Manager can help you assess your situation and guide you through the process.
There are also some areas of your finances that are not factors in whether a bankruptcy or Consumer Proposal may be ideal choices for you. Contrary to what many people may believe, considerations such as your credit history, credit score and account standings do not impact your eligibility to access debt help solutions like bankruptcy or Consumer Proposals.
There is no need to wait until you are facing a situation of extreme stress and financial crisis before connecting with a Licensed Insolvency Trustee.
Some people may have an ‘ideal’ credit history, while others may have low scores. In fact, as many as 70% of people who file for personal bankruptcy have excellent credit scores as they continue to make all of their minimum payments up until the point they declare bankruptcy.
- One major challenge in getting a consolidation loan to help manage debts is that many people find their credit score is too low to qualify for the loan.
- If you have accounts that are overdue, missed payments, or even collection actions being taken against you, there is a good chance your credit history won’t meet typical lender requirements for a loan.
- Others find that they are simply too over-extended credit-wise to be able to consolidate via a consolidation loan through a bank.
Although we’ve broken down several considerations, there are many variables to your unique situation – as Licensed Insolvency Trustees we would always encourage you to connect with a local representative directly before ruling out potential options and committing to any self-assessed debt solution. We are here to help you make informed decisions – debt help without judgment.
Get debt advice, understand the debt solutions available and get a financial fresh start – book your free confidential consultation with Sands & Associates now. Our debt help services are available across BC.