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4 Ways to Avoid Bankruptcy in Canada

Have you ever dreaded hearing the phone ring? Worried about dealing with a collection agency looking to collect on a debt that has grown far beyond your ability to pay off? If so, you aren’t alone. People file for bankruptcy every year—and there’s no shame in that.

In March of 2023, the Government of Canada reported that “the total number of insolvencies (bankruptcies and proposals) in Canada increased by 28.1% in March 2023 compared to the previous month” and that “the total number of insolvencies in March 2023 was 28.3% higher than the total number of insolvencies in March 2022.”

While bankruptcy can be a good tool for getting rid of your debt and putting an end to collection calls, it isn’t always the best option. If you want to avoid filing for bankruptcy, read on to learn a little bit more about it: what it is, when it can be a good idea, and four alternatives to bankruptcy.

What Is Bankruptcy?

Bankruptcy is a form of insolvency that falls under the Bankruptcy and Insolvency Act. Bankruptcies are administered by someone known as a Licensed Insolvency Trustee (LIT) who is licensed by the Government of Canada.

The LIT will help you understand the process of filing for bankruptcy, lay out the potential financial impacts, what debts you will still have to pay, and inform you about which assets you may lose or be able to keep if you file for bankruptcy.

Filing for bankruptcy in Canada is different from making a consumer proposal (another form of insolvency administered by an LIT) in a few key ways:

  • In a bankruptcy, you do not have control over which assets you keep or lose. The LIT will sell non-exempt assets you have to cover your debts to your creditors. In a consumer proposal, you may be able to retain your assets.
  • A consumer proposal is an agreement with your creditors that allows you to either pay a portion of what you owe (typically more than what they could get in a bankruptcy filing) or get an extension on your payment period.
  • If you do not maintain payments for a consumer proposal, the agreement defaults and the proposal is void.

When Is Filing for Bankruptcy the Right Choice?

When considering your options for getting out of debt, should you try to avoid bankruptcy? Remember: there is no shame in filing for bankruptcy if you really need to get out of crushing debt. Filing for bankruptcy can be a good option if you:

  • Have Lost a Major Income Source and Can’t Get Creditors to Extend Your Repayment Dates. If you or your significant other have recently become unemployed and are unable to make your monthly minimum debt payments on top of meeting basic living expenses, bankruptcy may be a viable option.
  • Are Making Your Monthly Payments but Aren’t Making Progress Towards Clearing Your Debt. If your debts aren’t shrinking even though you’re making consistent payments, then bankruptcy could be a useful tool for getting out of debt.
  • Find Yourself Borrowing More or Using Credit to Make Monthly Minimums. If you struggle to keep up with your minimum debt payments and monthly living expenses, you may find yourself borrowing more or using credit to keep up with these minimums. If you’re consistently depending on credit to make up the difference – it may be time to consider bankruptcy.
  • Have Reached Your Credit Limit. If you’re close to hitting the limit on what you can borrow and don’t see a path to paying your debt down, then you have no other choice but to file for bankruptcy.
  • Creditors Are Taking Forceful Tactics to Recover Money Owed. If your creditors are taking legal action against you to recover debt—such as taking you to court and getting a judgment for a wage garnishment—it may be time to consider filing for bankruptcy.
  • Can’t Get Your Creditors to Negotiate Your Debt. If you have excessive debt and aren’t able to get your creditors to agree to a consumer proposal or other bankruptcy alternatives, then you may need to file for bankruptcy.

If you need to escape debt, trying to avoid bankruptcy is a natural impulse. However, there are times when it is necessary and countless others have used this tool to get out of debt so they can get their lives back on track.


Why Avoid Bankruptcy?

Some of the biggest reasons to avoid filing for bankruptcy include:

  • The Impacts on Your Credit. When you declare bankruptcy, it will stay on your credit report as a negative event for six or seven years after the discharge, depending on the province. This can make it more difficult to secure financial services (such as loans and credit cards) in the future.
  • Loss of Assets. Under bankruptcy proceedings, your LIT will seize and “realize” some of your assets to make payments to your creditors to help cover your debts. Under a bankruptcy, you don’t have control over which assets are used to repay your debts—your LIT does. Though, if possible, they may try to consult with you to protect your most important non-exempt assets.
  • Potential Career Impacts. An employer cannot fire you for filing for bankruptcy in Canada. Unless a garnishment is placed on your pay or the LIT needs payroll information, your current employer might not even be notified that you’ve filed for bankruptcy—though some employers might have a conduct clause requiring you to disclose if you file for bankruptcy. However, future employers may see a bankruptcy filing in your financial history and could choose not to hire you if they feel it makes you a risk. For example, if you’re applying for a job where you would be handling large sums of money, the employer might opt to avoid hiring someone with financial issues on their credit history.

How to Avoid Bankruptcy: 4 Bankruptcy Alternatives

Now that we’ve covered some reasons why you might not want to file for bankruptcy, how can you avoid bankruptcy when you’re in debt? One of the first things to do is to look for some bankruptcy alternatives that you can leverage instead.

Bankruptcy Alternative 1: Debt Consolidation Loan

If you’re struggling with heavy debt but still have a good credit score, you may qualify for a debt consolidation loan. This is when you take out a new loan to pay off your existing debts—essentially rolling all of your debt into a single payment that is, hopefully, easier to manage.

With especially good credit, you may get a loan for a lower monthly percentage than the interest on your existing debts, which can help reduce the total amount of money you pay in the long run.

However, it’s important to exercise strict spending control after getting the loan. It’s all too easy to start leaning on your credit again before paying off the loan. This may lead to your overall debt increasing instead of decreasing.

Bankruptcy Alternative 2: Debt Consolidation Program

What should you do if you don’t have a great credit score and can’t qualify for a loan with favourable terms? Don’t worry—you still have options!

A debt consolidation program (DCP) is an alternative to bankruptcy, where you and a credit counsellor make an arrangement with your creditors. The counsellor negotiates with your creditors on your behalf to stop or reduce interest on unsecured debts, create a set timeline for debt repayment, and roll all debts into a single, easy-to-track fund.

Joining a debt consolidation program can have an impact on your credit score. However, the impact of a DCP on your credit is usually less than the impact of a bankruptcy proceeding.

DCPs provide a clear path to getting out of debt and prevent debt from getting worse for the duration of the program. 

Bankruptcy Alternative 3: Consolidating Debt Into Your Mortgage

If you have equity in your home (i.e., your home is worth more than you owe on your mortgage), then you may want to consider consolidating your debt into your mortgage.

Since mortgages are secured debts (the home being the asset securing the mortgage), they typically have lower interest rates than unsecured loans. This can make them a good way to reduce your overall interest payments. However, there are some factors to consider:

  • The Cost of Breaking Your Current Mortgage. Refinancing your home may result in added fees and costs. This may require you to carefully measure the cost of the fees against what you expect to pay in interest to see if it’s worthwhile for you.
  • How Consolidating Debt into Your Mortgage Affects Your Equity. When you roll other debts into your mortgage, you’re reducing the amount of equity you have available to cover other expenses (and delay the day when you’ll own your home free and clear). This can make it harder to get a home equity loan in the future if you need it to cover an emergency.
  • The Risk of Accruing More Debt. If you use your home to pay off your credit cards, you may find it tempting to start spending on those cards again. It may help to cut up the credit cards after you use a mortgage consolidation to pay them off for this very reason.

Before applying to refinance your mortgage, please consult with a financial advisor to see if this would be a good move for you financially.

Bankruptcy Alternative 4: Consumer Proposals

As mentioned earlier, licensed insolvency trustees administer consumer proposals and are another alternative to bankruptcy. Here, the LIT helps you negotiate with your creditors to create a repayment plan that lasts up to 60 months (five years). At the end of the period, you’ll be free of those debts if you’ve kept up with your payment plan.

However, for a consumer proposal to go through, your creditors have to agree to it. So, your LIT will have to balance your creditors’ needs against your own needs to find the best compromise. Most creditors will accept the proposal unless they strongly feel it isn’t enough.

How to Avoid Bankruptcy: Managing Debt Before It Becomes Too Large

Bankruptcy is sometimes referred to as the last option for getting out of debt. The impacts of it can be highly disruptive despite the benefits.

Ideally, the best solution is to avoid accumulating too much debt in the first place. An ounce of prevention is worth a pound of cure (especially when the cure has compounded interest attached).

Considering bankruptcy? Don’t lose hope, and keep in mind no financial challenge is too great to overcome with the proficient guidance of our credit counsellors. Check out these tips to begin your journey toward improving your financial situation:

  1. Sign up for debt management resources and support. Talking to a credit counsellor or a financial advisor about money management can help you learn what you need to know to avoid debt.
  2. Create a monthly budget and follow it. Tracking your monthly income and expenses can help you get the insight you need to eliminate wasteful spending that leads to excessive debt.
  3. Prioritizing debt repayments and focusing on the largest debts with the highest interest rates first. Take a few minutes to look at your debts, their interest rates, and your available budget for making payments, then use that information in a debt calculator tool to give yourself an idea of how long it will take to pay off your debt.
  4. Is your mortgage or rent payment higher than you can comfortably afford? Consider downsizing to a smaller home or one in a less costly neighbourhood if you can. Alternatively, if you live alone, consider sharing a space with a family member or friend and splitting the cost if the rules for the space allow it. When shopping for a new home, consider homes that are considerably less than the upper limit of your mortgage amount.

Are you in debt and looking for ways to avoid bankruptcy? Reach out to Credit Canada for assistance! Our credit counsellors have helped thousands get out of debt and back into life Our credit counselling is confidential, non-judgemental, and 100% free.

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