Canadians are starting to take charge of their finances more and more these days, including their debt. According to the latest statistics, consumers are opting in large numbers to renegotiate their debt rather than declaring bankruptcy. Personal finance experts are advising consumers to resolve their debts as quickly as possible in order to clear up their credit scores and get back into the black.
In order to get debts resolved faster, consumers are negotiating their debts rather than declaring personal bankruptcy and following the regimented and long financial penance that comes with this.
Let’s consider bankruptcy first.
When you declare personal bankruptcy you surrender everything you own to a trustee in bankruptcy in exchange for the elimination of your unsecured debts. Personal bankruptcy is a legal process, governed by federal law (the Bankruptcy & Insolvency Act). To go into bankruptcy in Canada, a person must live or do business in Canada, and must be insolvent. To be insolvent means:
• To owe at least $1,000.
• Not to be able to meet your debts as they are due to be paid.
Bankruptcies generally do not affect the rights of secured creditors, i.e., those who have a valid security against your property, such as a car or a house.
There is a required process you and your Bankruptcy Trustee must abide by in order to file for personal bankruptcy. For details of this process, visit Avoid Bankruptcy on our website. With bankruptcy, you will also be required to make payments to your trustee for distribution to your creditors. The trustee determines how much you will be required to pay. He or she calculates the amount by taking into account your total income, income standards issued by the OSB, and your personal and family situation.
At the end of the process, a first-time individual bankrupt is usually discharged from debts after nine months.
There is a negative impact with declaring bankruptcy. Depending on how many times it has been legally declared, a bankruptcy will remain on your credit rating or score for a minimum of 6 years up to 14 years. Through a bankruptcy you cannot obtain credit again for 6 or 7 years. With a bankruptcy program, you do not have any flexibility on what you want to pay, nor can you prioritize or exclude any creditors. Furthermore, if you miss any payments the bankruptcy program will become null and void.
How does negotiating debt compare to bankruptcy?
You can negotiate your debts with a formal consumer proposal through a trustee in bankruptcy. The trustee puts together an offer to pay creditors a percentage of what is owed to them over a specific period of time, or extend the time the debtor has to pay off the debt, or a combination of both. Payments are made through the trustee, and the trustee uses that money to pay each of the creditors. The debt must be paid off within five years.
There is no room for flexibility with a consumer proposal. You do not have any flexibility on what you want to pay, nor can you prioritize or exclude any creditors. Furthermore, if you miss any payments the bankruptcy program will become null and void.
Is a consumer proposal the only option for debt negotiation? No. There are debt relief firms in Canada that will negotiate debts directly with creditors for a fee. Recently there has been an influx of debt settlement firms in Canada that have casted a shadow over responsible debt relief. Consumers must do their research to find a reputable firm with Canadian roots that holds consumers interests at heart. Once you join a debt relief program, stay informed with your credit counselor as to the progress of your debt negotiations.
“Do not plan to take longer than three years to pay off your debt”, stated Gail Vaz-Oxlade in the March edition of NEWCONDOGUIDE. “There’s a phenomenon called “debt fatigue” that sets in if you live with your debt for too long. Thirty-six months should be your maximum repayment time frame.”
If you haven’t taken charge of your debts yet, do it now. If you prefer to hire professionals to resolve your debt, chose a company who has your best interests at heart and holds a successful history of clientele. Get your debts resolved as quickly as possible so you can move forward sooner than later..
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