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Bankruptcy may relieve you of your debt obligations, but it doesn’t come without serious consequences. That’s why it’s important that you exhaust all of your options before resorting to filing for bankruptcy, as it can have major ramifications on your financial health and well-being. Luckily, there are steps you can take to avoid going bankrupt while still alleviating your debt load.

Already filed for bankruptcy? Read this to learn how you can rebuild your credit.

What is Bankruptcy?

Simply put, bankruptcy involves giving up almost everything you own to a trustee in order to get rid of all your debts. You may be able to keep some belongings based on the province or territory that you reside in. Filing for bankruptcy is a legal process that’s governed by the Bankruptcy & Insolvency Act That allows consumers to alleviate all debt while still allowing creditors to get back at least some of what is owed to them.

Not everyone is eligible to file for bankruptcy. In Canada, a person must live or run a business in Canada within the last year. The federal law states that those filing for bankruptcy must also be insolvent, which means they must owe a minimum of $1,000 and be unable to meet all debts.

To understand how bankruptcy works in Canada and the United States, click here.

What Are the Effects of Filing For Bankruptcy?

In Canada, there are certain impacts of filing for bankruptcy that should be considered before opting for this means of getting out of debt.

Your Credit Will Be Negatively Affected

When you file for bankruptcy, a note will be placed on your credit report. This note will stay on your credit for 6-7 years for a first bankruptcy filing, and 14 years for a second. This can have a serious effect on your credit score, and therefore your ability to secure a loan.

Read this to discover how long information stays on your credit report.

You’ll Lose Your Valuable Assets

If you file for bankruptcy, you might still be able to keep some of your things, such as your furniture or clothing. However, you’ll likely lose any valuable assets you have in the process, like your home and vehicle. You could even lose any RRSP contributions made within the past 12 months, as well as your tax refund for the year that you filed for bankruptcy.

You’ll Have To Perform Some Bankruptcy Duties

The cost associated with bankruptcy can be impacted by your income. If you make a lot of money, your bankruptcy can cost you a lot more than if you make a lower income.

Earning a low income? To find out how you can get out of debt fast, check this out.  

During your bankruptcy, you will have to perform certain duties, including submitting your income statements every month to verify your earnings. If you make more than a certain amount, you’ll have to pay more.

Learn how to become debt freeCheck out this infographic to learn how to tackle your debt once and for all. 

Consider These Solutions Before Bankruptcy

Many Canadians find themselves swimming in debt and struggling to make their payments on time and in full every month. Some borrowers reach the point that they stand to lose everything if they are unable to get a hold of their debt, with bankruptcy soon to follow.

For those who are on the verge of bankruptcy, there are other options available out there that can and should be considered.

Debt Consolidation

The concept of debt consolidation essentially means consolidating all of your loans into one new loan. You would basically take out a new loan to pay off all your others. This option is especially helpful if you have a lot of high-interest debt that you’re finding impossible to pay off. By consolidating that debt into one loan with a much lower interest rate, you can effectively reduce the amount of money that you owe every month, making it easier and faster to pay it down.

For a more detailed article about debt consolidation, look here.

Canadians can use debt consolidation loans to consolidate credit card balances, personal loans, overdraft balances, and even high-interest payday loans. Debt consolidation can help to simplify finances and make it easier to manage one loan payment instead of many. This program can also help Canadians save money by reducing the interest rate associated with the loan by paying off high-interest debt with a reduced-rate debt consolidation loan.

Did your application for a debt consolidation loan get denied? Here’s what you can do.  

Debt Settlement

This option involves negotiating with your creditors to come up with some form of settlement to alleviate your debt. Basically, a debt settlement company will negotiate with creditors on your behalf to reduce the amount of money that you owe in order to make it easier for you to repay your debt. Ideally, the negotiated debt is settled at an amount that’s much less than what you really owe and is within your means to pay it off.

Click here to find out how you can qualify for debt settlement.  

If your creditors agree, you will need to pay a certain amount to your debt settlement company who will then pay off your creditors for you. These services may offer to act as the middleman between you and your creditors, and as such, they may ask that you sign a power of attorney to give them the authority to communicate on your behalf.

Before you agree to this arrangement, it’s essential that you are informed of every payment that your creditor receives to ensure your debt is really being paid with the money you’ve given to the debt settlement company.

If you’d like to negotiate a debt settlement on your own, read this first.

Consumer Proposal

A consumer proposal is usually arranged by a trustee and is a legal process between you and your creditors for you to repay a portion of the amount you owe. Of course, your creditors can reject the proposal if they are not comfortable with it. However, if they agree to it, a consumer proposal is another way to consolidate your debt and avoid bankruptcy.

How will a consumer proposal affect your credit? Find out here.

Final Thoughts

Bankruptcy may be a way to seek relief from your mounting debt, but its effects can be long-lasting and can impact your life for years after filing. While this might be the best option in some cases, it can be avoided in many others. If you’re drowning in debt, consider seeking credit or financial counselling to see what options are available to you and which program suits your situation best.

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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