Consumer debt is easy to rack up but hard to get rid of, especially when you carry as much as some residents in St. John’s do. Recent statistics show that consumer debt levels have been steadily rising across Newfoundland & Labrador. However, the same can be said about many places in Canada.
That said, it’s best not to let your consumer debt get too far out of hand, otherwise, a drastic solution, such as bankruptcy may be necessary. If you’re thinking that may be a possibility for you, keep reading for more information.
What is Personal Bankruptcy in St. John’s?
For those that aren’t familiar with the idea, declaring personal bankruptcy is likely your final line of defence from your unsecured consumer debt. The bankruptcy process in St. John’s needs to be filed legally through bankruptcy court in Newfoundland and will become part of the public record upon its validation. The procedure itself can only be administered by a Licensed Insolvency Trustee.
Generally, trustees are court-appointed and tasked with the same objective, to put bankruptcies and consumer proposals in motion while ensuring that all parties involved are treated objectively within the bounds of Canada’s Bankruptcy and Insolvency Act. Once you’ve been assigned a trustee in John’s, you’ll have to prove that you cannot possibly afford your debts. Your case will then be brought before a judge, wherein any collection efforts, wage garnishment, late penalties, and interest piling against you will cease.
Looking Into Pre-Bankruptcy Options?
Before you consider bankruptcy, however, it’s essential to do some research and speak to a professional advisor in St. John’s. That’s because bankruptcy, while practical in many ways, can have severe consequences for both your credit and finances, which we’ll elaborate on further below. Under certain circumstances, it may even affect your spouse. Therefore, this procedure is only to be used as a final resort when no other alternatives are effective, but you have a reasonable income that will support all the additional costs you must cover throughout the process.
So, if you’re trying to avoid this drastic legal procedure, which you should if possible, there are a few pre-bankruptcy options you can look into in St. John’s, including but not limited to:
- Consolidate the debt using your home equity
- Ask your family or friends for help
- Request a debt consolidation loan from your bank or another lender in St. John’s
- Enroll in a debt consolidation program with a credit counselling agency in St. John’s.
- Contact your lenders to arrange a debt settlement
Bankruptcy vs. Consumer Proposal
If none of the solutions above work and you’ve racked up between $5,000 (minimum) and $250,000 (maximum) of unsecured debt, there is one more alternative to bankruptcy. In this case, we’re talking about a consumer proposal, which is a similar, yet different legally binding process filed by a Licensed Insolvency Trustee. Nonetheless, there are many significant differences between a consumer proposal and a bankruptcy.
Your Payments
Once your bankruptcy goes through, your unsecured debts should be totally gone. However, if your monthly income is over the threshold designated by the Office of the Superintend of Bankruptcy, you’ll need to make surplus income payments over an assigned payment period. Other bankruptcy costs may include a base contribution of around $1,800 as a fee for your trustee’s services. So, while your debts have been cleared, you’ll still have non-adjustable payments to make directly to the court, all of which you must make on time and in full to avoid further penalty. Typically, your bankruptcy duties and payments last a minimum of 9 months
Click here to see how your bankruptcy payments are calculated.
On the other hand, when you file a consumer proposal in St. John’s, your trustee will contact the lenders who hold the majority of your debts and request that your outstanding balance is reduced. The lenders will then meet to discuss the conditions of the proposal and must either accept or reject it within 45 calendar days. If they agree, you’ll be able to pay your reduced balance via monthly installments over a maximum period of 5 years. You’ll also have the opportunity to finish your proposal early by increasing your payment amounts or making more than one payment per month.
The Potential Loss of Your Assets
Unlike a consumer proposal, you can declare bankruptcy once you have at least $1,000 of consumer debt. There is also no debt limit. The problem is that your debt might be so large that the Court will order the funds to be extracted from your assets. This might be the equity in your home, your car or another vehicle, even the money you’ve invested in your RRSP account.
This is not a risk in the case of a consumer proposal. Any and all payments you’re required to make will be extracted directly from your bank account.
Look here to find out what happens to your leased car during bankruptcy.
The Effect On Your Credit
The heavy negative impact on your credit is one of the worst parts about both of these debt solutions, as your progress will be reported to Canada’s credit bureaus (Equifax and TransUnion). This will affect your credit report, as well as the credit ratings of any accounts that were involved with the bankruptcy or proposal.
For some information about your credit score and credit rating, read this.
With a bankruptcy, your credit report will retain the event for 7 years after the case has been discharged (for more information about bankruptcy discharge, click here). Additionally, your credit rating will fall to the lowest rank of R9. These two elements, coupled with the fact that you filed for bankruptcy in the first place, can make it almost impossible to obtain new credit in St. John’s, at least until you’ve managed to improve the situation. It’s also possible that your existing accounts were frozen during the process, so having a good income before your file is essential if you aren’t going to have access to credit.
The effect of a consumer proposal, while still negative, is less harmful. Firstly, your credit report will only retain the data for 3 years after you’ve completed all your payments. On top of that, your credit rating will only descend to an R7. Though neither of these results is ideal, prospective lenders in St. John’s will still consider you more creditworthy than a bankrupt borrower. It may even be possible for you to get approved for a loan, albeit with a higher interest rate than any normal loan would have.
Need to Repair Your Credit After Bankruptcy?
So, we’ve established that bankruptcy in St. John’s can do a lot of damage to your credit report, which can also significantly decrease your credit score. Luckily, even when you have very bad credit, there’s always a way back if you’re willing to work hard for it. The key is patience, as major credit improvement does not happen overnight. Here are a few simple techniques:
Speak With Non-Credit Companies in St. John’s
If you have bills that aren’t related to credit, such as those from utility companies and internet providers, you can request that your payments be reported to the credit bureaus. Just be careful not to default on any of those payments or the results would be negative again.
Wondering which credit bureau your lender checks? Click here to know.
Get a Secured Credit Card
Since you won’t qualify for any regular cards, you may have to apply for a secured credit card when you need credit. Paying a security deposit will allow you to activate one of these cards, which will be refunded once all balances are paid and you cancel the account. While the card is active, however, any responsible use of it will slowly increase your credit score.
Apply For a Guarantor Loan
If you’d prefer an installment-based product, rather than a revolving one (like a credit card), you can apply for a guarantor loan, wherein you also need a type of security to be eligible. However, instead of offering a deposit, you’ll have to ask a trusted friend or family member with healthy finances to cosign your application. Again, you must make timely and full payments, because the responsibility of them will fall to your cosigner if you default, which would damage both of your credit reports.
Attend Your Credit Counselling Sessions
This one we cannot stress enough. During your bankruptcy, you’ll be required to attend at least two credit counselling sessions. These are courses taught by certified counsellors that will give you the financial knowledge required to bounce back from bankruptcy and avoid it in the future. While going to the sessions won’t directly affect your credit, the advice you gain and the solutions that your counsellor can refer you to should.
Failure to attend your mandatory sessions will result in a penalty, so it’s best that you show up on time and ready to participate. Either way, credit counselling is something that can help any St. John’s borrower, even when they aren’t involved in a bankruptcy.
Does Every Kind of Debt Qualify?
Before you file for bankruptcy in St. John’s, it’s important to understand, like with many other debt settlement techniques, only certain kinds of debt can be included. As we mentioned earlier, unsecured debt, where there’s no collateral involved, is one of them. This is common for small loans and personal lines of credit. Some types of debt unrelated to credit will also be eligible.
Other Examples
- Rent payments
- Utility, internet, and cell phone bills
- Unpaid tax debts
- Credit cards
Secured debt, on the other hand, won’t qualify. When you apply for a sizeable loan or other expensive credit product, you can provide security to access larger amounts of credit and lower interest rates. As a result, your lender will retain ownership over the asset’s title during your payment plan. Therefore, it cannot be included in bankruptcy.
Examples
- Home equity loans and HELOCs
- Mortgages
- Car, truck, and other vehicle loans
- Lawsuits, fines, and other legal costs
Looking For Relief From Debt?
If you’re currently struggling with your debt load and are interested in what options are available to you in St. John’s, including bankruptcy, Loans Canada can help.
