Alternatives to Bankruptcies: Pros and Cons of Filing in Canada

Navigating a financial slump can be a difficult and uncertain time for individuals and businesses alike, with bankruptcy often looming as the only option. But luckily, there are some bankruptcy alternatives to consider before taking such a drastic step, including debt consolidation, consumer proposals, credit counseling, and debt settlement.

This article will:

  • provide an overview of the pros and cons of bankruptcy in Canada, 
  • explore different bankruptcy alternatives, 
  • identify relevant costs and risks of each, and 
  • discuss the implications of a successful discharge from bankruptcy. 

Weighing up all the options will help you make an informed decision about your finances and avoid the long-term consequences that come with bankruptcy.

Bankruptcy Alternatives – A Short Summary

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It is important to weigh the pros and cons of bankruptcy before making a decision.

Consider alternatives to bankruptcy, such as a consumer proposal, debt consolidation, credit counseling, and debt settlement to minimize long-term financial implications. Each of these bankruptcy alternatives has its own benefits and drawbacks that should be considered before pursuing them.

Step 1: Weigh the Pros and Cons of Bankruptcy

The purpose of filing for bankruptcy is to provide debtors with a means to discharge their unsecured debt obligations and begin anew. Prior to filing, individuals must consider both the potential benefits and drawbacks of filing for bankruptcy.

Bankruptcy can provide debtors with much-needed relief, protection from creditors, and a fresh financial start or a new opportunity to begin their financial journey. However, it may incur costs, lead to the loss of non-exempt assets, cause damage to one’s credit score, and require the fulfillment of certain obligations for discharge.

Weighing the pros and cons of filing for bankruptcy is essential to ensuring that the decision to file for bankruptcy is the correct one.

Benefits of Bankruptcy

Bankruptcy is a legal process designed to provide debt relief to individuals who are unable to meet their financial obligations. Filing for bankruptcy offers debtors the opportunity to obtain relief from their creditors, protection from further legal action, and a new beginning financially.

The Automatic Stay of Proceedings, issued upon filing a bankruptcy filing, prevents creditors from initiating legal action and halts collection attempts, including wage garnishment in most instances. After being discharged, individuals no longer have the financial strain of their unsecured debt and can instead focus on saving and making regular payments to restore their credit.

Drawbacks of Bankruptcy

Filing for bankruptcy has a detrimental effect on one’s credit score, resulting in an R9 notation on the credit report. This notation can have a considerable negative impact on one’s credit score and remain for up to six years following the bankruptcy discharge itself.

Additionally, there are associated costs associated with filing for bankruptcy, such as a monthly surplus income costs and asset repurchase costs, where applicable. Further, individuals may be required to surrender certain non-exempt assets unless they wish to buy these assets back from the Trustee.

To be successfully discharged, debtors must complete credit counseling sessions, pay all applicable fees, and submit monthly income and expense forms with supporting documents.

Furthermore, the bankruptcy process is incredibly complex. Certain debts are not dischargeable when an individual files for bankruptcy. Reviewing your situation with a Licensed Insolvency Trustee before deciding to file bankruptcy is important.

Step 2: Consider Alternatives to Bankruptcy

Bankruptcy can have a long-lasting and serious negative impact on an individual’s credit score and financial prospects. As such, it is important to explore alternatives to bankruptcy before filing for it. These bankruptcy alternatives include:

Each of these bankruptcy alternatives has its own advantages and disadvantages, and it is important to weigh them before making a decision.

Bankruptcy Alternative #1 – Consumer Proposal

A consumer proposal is an alternative to bankruptcy and requires the assistance of a Licensed Insolvency Trustee. A consumer proposal allows a consumer to formally negotiate with their creditors regarding their unsecured debt.

This alternative to bankruptcy begins with a meeting with a Licensed Insolvency Trustee who will review your options, including a consumer proposal and bankruptcy. This is known as an initial interview. Based on the information you provide to the Trustee, they will give you a rough idea of what your situation could look like with each option.

A consumer proposal can reduce debt by up to 80%, and the repayment plan is usually in the form of a monthly payment you make over a 5-year period. There is no interest and no penalties to pay it off early.

A consumer proposal is a popular bankruptcy alternative and worth considering.

Bankruptcy Alternative #2 – Debt Consolidation

Debt consolidation is a bankruptcy alternative that involves using personal loans or combining multiple debts into a single loan with a lower interest rate. This can be a beneficial strategy for managing debt, as it can help to reduce overall interest charges.

The process of debt consolidation in Canada usually involves obtaining an unsecured personal loan to pay off existing debts. Additionally, this bankruptcy alternative offers a number of benefits, such as:

  • a lower interest rate applied to debt, 
  • the ability to pay off debt more quickly, 
  • no damage to your credit rating and the potential to improve it, 
  • no public record, and 
  • sometimes offers lower costs.

However, qualifying for these loans can be difficult for those already struggling financially.

Bankruptcy Alternative #3 – Credit Counselling

Credit counselling is an alternative to bankruptcy offered by non-profit organizations to assist individuals who generally have lower debt loads. Their programs often involve repaying 100% of an individual’s unsecured debts. When a consumer’s debt load is higher than normal, these payments can often be quite high, so other bankruptcy alternatives must be considered.

Bankruptcy Alternative #4 – Debt Settlement

The final alternative to bankruptcy we’ll discuss, debt settlement, is a strategy for reducing the amount of debt owed to creditors by negotiating a settlement amount. When available, it is an effective way to resolve outstanding debt for less than the full balance. Debt settlement involves negotiating with creditors to accept a one-time payment that is lower than the total amount owed.

The debtor typically provides this payment after they have accumulated sufficient funds to make the offer. This is the biggest downfall to informal debt settlement as most individuals who owe money and are struggling do not have the means to save up a lump sum of money required to offer a settlement.

Debt settlement can harm one’s credit score, despite popular belief. Consumer beware – many ‘fly-by-night’ informal settlement organizations out there promise the world. If you pursue this alternative to bankruptcy, make sure you ask a lot of questions to ensure you are properly informed.

FAQs Regarding Bankruptcy Alternatives in Canada

Which of These Bankruptcy Alternatives offers Debt Forgiveness?

Before we get into debt forgiveness, it’s important to understand what debt can be forgiven with bankruptcy or an alternative to bankruptcy. The only debt that any of these options can forgive is unsecured debt.

  • Unsecured Debt – This would include any debt not secured by a tangible object. Examples of unsecured debt include payday loans, credit card debt, medical bills, overdue utility bills, and personal loans.
  • Secured Debt – This debt is secured by an object that can be repossessed if you fail to make payments on the debt. Examples of secured debt include home loans, car loans, boat loans, and home equity loans.

The only way to have secured debt dealt with is to surrender the underlying asset that is secured against the debt. The only legislated options for unsecured debt forgiveness are bankruptcy or a consumer proposal.

Are there Bankruptcy Alternatives that won’t Damage Credit Scores?

Bankruptcy, consumer proposals, debt settlements, and credit counselling will all negatively affect your credit to one degree or another. Out of all the bankruptcy alternatives we’ve listed, only debt consolidation will not negatively affect your credit score. The only problem with this is that most people considering bankruptcy or one of its alternatives may not have a decent enough credit score for debt consolidation.

Can Bankruptcy Alternatives Forgive Student Loan Debt?

If you have outstanding student loan debt that is weighing you down financially, you only have two options to have this debt forgiven: bankruptcy or a consumer proposal. Even then, student loan debt isn’t automatically forgiven.

The only way to have student loan debt forgiven through bankruptcy or a consumer proposal is if you’ve been out of school, full-time or part-time, for longer than seven years.

Will Bankruptcy Alternatives Stop Wage Garnishments?

If your wages are already being garnished, a consumer proposal is the only one of the bankruptcy alternatives that can put an end to these garnishments. Once a consumer proposal (or bankruptcy) is filed, your creditors will receive a “stay of proceedings”. This stay ends all threatened and existing wage garnishments, harassing phone calls, or liens placed on your assets.

Which of These Bankruptcy Alternatives is Right for Your Situation?

Every situation is different. If you have very good credit and want to keep it that way, a debt consolidation loan may be the best bankruptcy alternative for you. If you only have a few very small debts you’re unable to pay, reaching out to your creditors with a debt settlement may be best.

For anyone whose debts are overwhelming, and there just doesn’t appear to be any relief in sight, a bankruptcy or a consumer proposal may be what you need to get back on track financially. The best way to be sure if bankruptcy or a bankruptcy alternative is what’s right for you is to reach out to a Licensed Insolvency Trustee. They will go over all of your financials with you to help you decide what’s best for your situation.

FAQs Regarding the Pros and Cons of Filing Bankruptcy in Canada

What Will I Lose If I File Bankruptcy?

It is a common myth that an individual loses everything when filing for bankruptcy. During the initial interview, your Licensed Insolvency Trustee will cover any potential risks (and rewards) a bankruptcy would provide and compare that to other bankruptcy alternatives. In most instances, you will get to keep your house, your cars, and any other assets you may have.

Does Bankruptcy Affect Your Life?

Generally speaking, most day-to-day activities will not be impacted because you filed for bankruptcy. Activities that involve credit, however, can be impacted. These are items such as obtaining new credit, activities that involve a credit check, etc. Normally, however, these can be mitigated with a proper plan.

How Long Does It Take To Rebuild Credit After Bankruptcy?

Rebuilding your credit after bankruptcy takes commitment and dedication to creating and maintaining good credit habits. Depending on where you start from and the steps you take, reaching a healthier financial standing could take up to two years or more from when you are discharged.

However, with consistent effort, you will see improvements as you move along.

What Are The Disadvantages Of Filing For Personal Bankruptcy?

The main disadvantage to filing for personal bankruptcy is the negative credit impact. In addition, if you are required to file bankruptcy more than once, the repercussions become more severe. As a result, filing for bankruptcy should only be done as an absolute last resort after careful consideration.

Pros and Cons of Filing for Bankruptcy in Canada & Bankruptcy Alternatives – Our Conclusion

Filing bankruptcy has always been a popular option for resolving overwhelming debt. While this approach has several benefits, such as debt relief and protection from creditors and legal action, it can also lead to long-term financial repercussions. With that in mind, considering bankruptcy alternatives, prior to filing for bankruptcy for overwhelming debts, is a wise decision.

Consumer proposals, debt consolidation, credit counseling, and debt settlement are all potential bankruptcy alternatives that may help reduce long-term effects while providing debt relief in the short term. Each of these alternatives to bankruptcy comes with its own unique set of pros and cons, as well as differing levels of risk and reward.

The best course of action, whether it’s bankruptcy or one of the bankruptcy alternatives discussed above, should be tailored to the individual’s specific needs and financial situation. Seeking the advice of a Licensed Insolvency Trustee can help ensure that a given option is appropriate and provides the most benefit possible.

Powell Associates Ltd offers debt relief options, including bankruptcy and bankruptcy alternatives, in all major cities in the Maritimes, including Fredericton, New Brunswick; Halifax, Nova Scotia; and Charlottetown, Prince Edward Island (PEI). Feel free to reach out to us for a free, no-obligation consultation.

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