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Unfortunately, if you have trouble managing your money or have experienced some recent financial hardship, those kinds of costs can lead to a lot of consumer debt landing on your plate.
What’s more, consumer and household debt can come from many other sources and, in the worst of cases, get so unmanageable that a drastic legal procedure known as bankruptcy becomes your last resort. Keep reading if you’re interested in discovering the benefits and drawbacks of this procedure.
Why is Bankruptcy a “Last Resort”?
As previously mentioned, personal bankruptcy is a type of procedure that you can file for in Canada, which discharges you from various forms of household and consumer debts. Within the bounds of the Bankruptcy and Insolvency Act of Canada, the ordeal will become a matter of public record once it’s in effect.
The bankruptcy process must be administered and supervised by a court-appointed officer known as a Licensed Insolvency Trustee (LIT), who will guide the debtor through the process and make sure that they, as well as their creditors, are treated fairly (for more information about LITs, click here). Because it’s a legally binding process, this should also end any debt collection penalties that you’ve been charged with, such as added interest or wage garnishment.
The Resulting Damage
While bankruptcy is certainly one of the most effective ways of eliminating or at least reducing your debts, it should still only be considered as a last resort because of the major negative impact that it can have on your financial profile as a whole.
For instance, personal bankruptcy can result in:
- Your assets (home equity, vehicles, etc.), RRSP account, and windfalls (lottery winnings, inheritance, etc.) being seized as compensation.
- A black mark appearing on your credit report for 7 years following your official date of discharge.
- An R9 credit rating for any credit accounts that are associated with the process.
- A severe decrease in your credit score.
- A mandatory base contribution of $1,800 – $2,000.
- Mandatory surplus income payments over a minimum period of 9 months (if your gross monthly income surpasses the court-designated threshold).
It’s clear that one of the main disadvantages of a bankruptcy relates to the hefty negative toll it has on your credit. In fact, you may have to live without credit products altogether during and in the years that follow your bankruptcy because of how diminished your creditworthiness will become.
As a result, the vast majority of creditors will consider you too risky to approve for new products, at least the ones with favorable conditions. For instance, if you were to need a loan, then a subprime creditor might be your only choice. There, you would only be able to secure a small amount of money with a high interest rate, as would be the case with a payday loan.
When to Choose Bankruptcy
Suffice to say that bankruptcy in Guelph, while highly effective at eliminating many types of debt, can also have severe consequences for your financial profile.
Only resort to bankruptcy if:
- You have at least $1,000 of unsecured debt that you cannot pay off
- You have no assets or don’t mind risking the ones you do have
- You’re comfortable with severe damage to your credit and finances
- Interest, late fees, and debt collection penalties are piling up against you because of multiple defaulted payments
- You’ve discussed the situation with a financial advisor, credit counsellor, and/or Licensed Insolvency Trustee, and determined that it is truly your only option
- You have run through all the practical solutions, such as:
- Earning more income
- Borrowing from friends or family
- Withdrawing funds from your home equity
- Applying for a debt consolidation loan
- Entering a debt consolidation program
- Offering a debt settlement to your creditors
- Filing a consumer proposal
What is a Consumer Proposal?
If bankruptcy is your last resort, then a consumer proposal is your second to last, being that it generally causes less damage to your credit and finances. However, the two procedures are similar in certain respects, which can be confusing, so let’s discuss how a consumer proposal may (or may not) be a better option for you.
Like bankruptcy, a consumer proposal is a legal procedure that frees you from your unsecured debts through a series of payments. The process itself must also be conducted by a Licensed Insolvency Trustee and will eventually become a matter of public record. Some mandatory court duties, such as credit counselling sessions may also be involved.
For everything you need to know about bankruptcy court, take a look at this.
All this said, a consumer proposal is vastly different because:
- You must have $5,000 – $250,000 of debt to be eligible.
- The court will not seize your assets, RRSPs, or windfalls as compensation.
- While bankruptcy payments would fluctuate according to your income/assets, a consumer proposal can allow your trustee to negotiate a reduced final debt balance with your creditors, which they will have 45 days to accept or decline.
- If the proposal is accepted, you will repay your outstanding balance on a monthly basis and the payments will be sent directly to your creditors.
- You will have a maximum of 5 years to complete your payments, but you will be permitted to repay your outstanding balance early, if you want.
- The impact on your credit will be less harsh, since your credit report will only retain the information for 3 years following your final payment, and your credit ratings will be changed to R7 (rather than R9).
Despite the negative impact that a consumer proposal can have on your financial profile, the one that follows a bankruptcy has the potential to be much worse and should therefore be avoided whenever possible.
Do you know what happens to your debt when you file a consumer proposal? Check out this article.
What Debts Must Be Excluded From a Bankruptcy?
Not all debts are eligible for coverage under Canada’s Bankruptcy and Insolvency act. The procedure is typically restricted to unsecured debts, though some forms of non-credit debt will also qualify.
A secured debt, on the other hand, involves a lien that a lender holds on one of your assets, which you may have granted them temporary ownership over when you applied for a large loan or other credit product. At the time, this would have reduced risk for the creditor and helped you secure more credit at a lower interest rate.
Unfortunately, if the lien is still in effect the debt cannot be included in a bankruptcy. Various kinds of legally assigned or government-related debts may also be ineligible, so be sure to look at the examples below before you attempt to declare bankruptcy in Guelph.
How is secured debt treated during bankruptcy? Click here to find out.
- Unsecured loans
- Personal lines of credit
- Credit cards
- Traditional student loans
- Payday loans
- Non-credit bills (internet, utilities, etc.)
- Secured loans
- Home equity loans or lines of credit
- Vehicle loans
- Federally funded student loans
- Legal fines (tickets, lawsuits, etc.)
How to Improve Your Credit After Bankruptcy?
Unfortunately, if you are forced to declare bankruptcy in Guelph, improving your credit will indeed take a lot of time and effort. Nonetheless, the trouble will definitely be worth it, especially when you consider how bad the situation could get if you don’t take immediate action to eliminate your debts.
If your credit is already damaged as the result of a bankruptcy, don’t panic, because there are plenty of things you can do to rebuild it, such as:
- Apply for a secured credit card and use it to make responsible payments
- Apply for a guarantor loan with a cosigner and use it for the same purposes
- Regularly check both versions of your credit report (Equifax and TransUnion)
- Dispute any errors, signs of fraud or identity theft that you find within your report
- Formulate a proper budget and monitor your spending habits closely
- Pay any existing bills and/or credit products responsibly from that point on
Need More Bankruptcy Information?
If you think you’re in danger of declaring bankruptcy in Guelph or if you’d like to avoid the process altogether, don’t hesitate to make Loans Canada your primary source of information and solutions. Simply contact us today or check out our website!