KEY TAKEAWAYS:
✔ Bankruptcy is a legal process wherein an individual can be discharged from many, though not all, of their debts.
✔ A declaration of bankruptcy remains on your credit report for 7 years after the discharge date.
✔ Debt consolidation may be a reasonable alternative to filing for bankruptcy.
For millions of people, the time comes when the money coming in does not add up to the money going out and there’s no short-term solution in sight. That’s the time to seek expert advice and consider the two legal options open to every Canadian – bankruptcy and consumer proposals (also called insolvency). They are not the same but they both offer a long-term solution to help you get back on your feet.
No matter what your financial situation is, it pays to understand your options and the long-term effects of the decisions you make today. First things first. Bankruptcy versus credit proposals.
What is bankruptcy?
Bankruptcy is a legal proceeding that is typically initiated when a person (called the debtor) cannot pay their debts. The process begins when they file paperwork as per the Bankruptcy and Insolvency Act. The purpose of bankruptcy is to permit the debtor to obtain a discharge from most of their debts (in many cases, all unsecured debts can be eliminated). Bankruptcy must be filed through a Licensed Insolvency Trustee who will ensure that both the debtor and all creditors are treated fairly. As this is a legal process, it comes with a fee that must be paid by the debtor (the cost starts at around $1,800 and increases based on the administrative work involved).
While filing for bankruptcy can clear most (if not all) of your debts and create a fresh start, it comes at a price. Your credit score will be significantly impacted, as will your ability to gain access to credit. Both of these effects can be long-term, staying on your credit rating for at least seven years (14 years if you’ve filed for bankruptcy previously).
What is a consumer proposal?
A consumer proposal is an alternative to bankruptcy. It’s a legally binding agreement to repay a portion of your debt to each creditor over a specific period of time in return for complete and full debt forgiveness. All payments are interest-free and can be spread out over up to five years, based on what you can afford to pay. This method is sanctioned by the Canadian government as an alternative to declaring bankruptcy and may be worth it if you can afford to pay back some of your debt.
To qualify for a consumer proposal, you must meet specific requirements such as:
- Being a resident of Canada
- Owing $250,000 or less (excluding your mortgage)
- Having debts greater than your assets (confirmed insolvency) and demonstrating an ability to successfully repay a portion of what is owed.
Like filing for bankruptcy, initiating a consumer proposal will have a negative impact on your credit score and your ability to get approved for credit in the future.
Alternatives to bankruptcy and insolvency in Canada
If you can’t pay your bills or keep up with your debt, there are options that allow you to avoid declaring bankruptcy or creating a consumer proposal. A consolidation loan may be an affordable alternative that won’t damage your credit rating. This is a new loan to cover payments on one or more outstanding loans, often with better terms and/or at a lower interest rate. It combines all of your separate debts into one easy payment, enabling you to protect and avoid damaging your credit score while rebuilding your financial situation over time. Debt consolidation can help save you money on interest payments and other fees, and simplify your monthly budget. For many Canadians, it creates a much-needed bridge to get them through hard times.
While there is no one-size-fits-all solution, it’s best to look at options like this one before making the leap to consumer proposals or bankruptcy. This easy-to-use debt consolidation calculator can help you estimate your monthly payments based on what you owe.
For more alternatives to bankruptcy, see “5 steps to rebuild your credit score after bankruptcy"
Ready to get back on track with your finances? We can help.
If your debts are larger than you’re comfortable with, don’t wait - please reach out to your local easyfinancial branch to discuss your needs, or give us a call at 1-888-502-3279. We’d be pleased to offer guidance on how to address your debt and move forward with your life.
Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.
