According to government statistics, nearly 100,000 people filed for insolvency, of which bankruptcy accounted for nearly 33,000 of those in Canada in 2020. What’s more interesting, however, is that the number of people filing for bankruptcy is on the decline.
Instead, people are avoiding bankruptcy by seeking alternatives to bankruptcy. These alternatives include debt consolidation plans, debt management, and credit counselling to avoid bankruptcy.
If you have creditors breathing down your neck and you’re looking for ways to eliminate your debt without having to file for bankruptcy, you’ve come to the right place. Here, we list a few alternatives to bankruptcy that could improve your financial situation and help you become debt-free.
Types of Bankruptcy in Canada
Unlike the US, Canada has only one kind of bankruptcy that applies to not only personal situations but businesses as well. Small Business Bankruptcy and Corporate Bankruptcy are certainly more complex than personal bankruptcy and won’t be a subject of discussion for this article.
Seeking Bankruptcy Alternatives
If you are a small business owner and unsure of what to do to pay back the money you owe, it is best that you seek the advice of professional debt counselling, ideally from an unbiased party.
If that is not an option for you, there are many non-profit credit organizations that you can contact. They can help you get a free confidential consultation with a credit counsellor.
This free confidential consultation should help you get to grips with what you will need to do to pay your debts in full and avoid filing for bankruptcy.
The Three Bankruptcy Alternatives
Your debt advisor or credit counsellor will suggest a bankruptcy alternative for you from the following list after considering your income, the total amount you owe, your ability to get a new loan, and the interest rates that you would qualify for.
A consumer proposal is the most common way to seek debt relief if you think that there is no way you can avoid declaring bankruptcy. In 2020, the use of a consumer proposal as an alternative to bankruptcy increased by 7% over 2019.
A consumer proposal involves a licensed insolvency trustee (your proposal administrator) who files the appropriate paperwork with the government and your creditors to allow you to formally negotiate with your creditors.
A consumer proposal can only be filed when you are unable to repay your debt as it is due, and your creditors will receive less money in the event of bankruptcy than they would through a consumer proposal.
Remember that certain kinds of debts, such as child support or alimony, are exempt from being a part of the proposal. However, a consumer proposal not only reduces the money you have to repay but also allows you to keep certain assets.
Debt consolidation is a form of debt settlement that offers its own financial incentives. During consolidation, you take out a debt consolidation loan that allows you to pay off your other loans. After this, you only have to worry about a single loan with one monthly payment.
Remember to take out a loan that grants you a credit line, as that is far preferable to a credit card. This is because the interest rate charged (and thus the minimum payment) will be much lower.
A credit card usually has a rate that increases as you miss your payments, potentially pushing you to file for insolvency. It is best to search for and contact a debt advisor (commonly referred to as a credit counselling) service that can analyze your debt situation and come up with a debt management plan for repayment.
Be Considerate of the Future
Make sure that you plan for the future when opting for consolidation. For example, taking out a second mortgage on your home may put your family in jeopardy.
Think, for example, how different your financial situation will be in 5 years, and whether this loan will cause you any problems trying to pay your debts.
A consolidation loan is ideal for unsecured debts, as those debts usually have an extremely high interest rate. Your new debt management plan will almost certainly have a lower interest rate and will make payments easier.
Informal Debt Settlement
During an informal settlement, you seek debt relief by negotiating with individual creditors. If you can prove to creditors that you do not have the income to make your payments, they may consider your financial situation and change the terms of the debt.
However, this is a long and tedius process, so make sure that you are up for it. We would only advise you to pursue an informal settlement if you have a select few creditors, and negotiating your debts won’t take up too much of your time.
How to Avoid Filing for Bankruptcy
While the three aforementioned methods are the main options available to you if you have large debts, you can still avoid bankruptcy altogether. Here are a few financial tips that can help you avoid the law.
- Cut down on your expenses. Take a look at your expenses and see where you can avoid spending money. It is more than likely that you can save some cash here or there.
- Seek free financial counselling. While a lawyer would cost a lot of money, it is possible to find professionals who can help a debtor get started with the process of paying back their debt.
- Sell assets that you can. Remember that if you sell select financial instruments at a loss, you may be able to cut your tax bill.
- Try to borrow money for the short-term from friends and family. Not only will it be interest-free, but they won’t call you every day to try and collect either. Just make sure you can easily pay it back, or you may have to change your phone number and last name (just kidding). This can be a slippery slope so make sure you can 100% pay the funds back in a timely manner.
Which Alternative to Bankruptcy is Right For Me?
Without a professional debt advisor, it will not be easy trying to determine the best way to go debt-free. However, you have 3 ways to make debt payments much easier in Canada.
That said, for a small percentage of people, defaulting on their debt may be the better option. Most others, however, will be better off with a consumer proposal or a debt consolidation loan, as they will not impact your credit report as severely and make future financial decisions much easier.
This article was written by David Moffatt. A Debt Relief Expert. He has helped assist in creating plans that have helped save Nova Scotia residents over $30 million dollars of consumer and tax debt since 2015. We believe that no consumer should have to struggle with the stress of overwhelming debt. Our debt restructuring strategies can help you cut your debt by up to 80%.
If you are struggling with debt please reach out. It hurts to continue to suffer financially. Halifax Debt Freedom services Halifax, Dartmouth, Bedford, Sackville the entirety of HRM, and all of Nova Scotia.