Debt Relief Experts
If you can’t keep up with debt payments, you may wonder if it’s time to file for bankruptcy. Bankruptcy isn’t a one-size-fits-all solution, nor is it always the correct answer for everyone. It’s a significant legal and financial step that requires careful consideration.
Anyone can find themselves facing severe debt. Financial struggles don’t discriminate by age. Young adults aged 18-29, often grappling with student loans and early career instability, account for 15% of bankruptcies. The highest proportion, 32%, falls in the 30-39 age range, where many face the combined pressures of career advancement, repaying student loans, building a family, and the desire for home ownership. Middle-aged individuals aged 40-49 represent 24% of filings, potentially dealing with career setbacks or family-related expenses. Those in their 50s make up 17% of bankruptcies, possibly due to unexpected job loss or health issues. Even Canadians 60 and older aren’t immune, accounting for 12% of filings, as fixed incomes may struggle to keep pace with rising costs. These statistics underscore that financial difficulties can arise at any point in life, whether from personal circumstances, economic downturns, or unforeseen events.
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Signs You Might Need to Consider Bankruptcy
Many Canadians struggle to make ends meet and take on consumer debt to help pay for increased living costs. At what point does debt become so overwhelming that bankruptcy becomes a debt relief option?
Here are some signs you may need to go bankrupt:
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Your debt payments take up too much of your take-home pay
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You can’t meet even the minimum payments on your debts
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You have missed or late payments, and these are beginning to impact your credit
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You are receiving frequent calls or notices from collection agencies
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You are afraid to open your mail because of outstanding bill payments
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You have maxed out your credit cards and all other borrowing options
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You are using high-cost loans, like payday loans, to keep up with other loan payments
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Creditors have threatened legal action, including a wage garnishment or repossession of your vehicle.
These are common signs that you may be insolvent, meaning you can’t repay your bills as they come due.
Often, the decision to file personal bankruptcy is triggered by a catastrophic life event—job loss, divorce, separation, or illness—that makes a bad financial situation worse.
Regardless of the reason, if you’re facing overwhelming debt, it’s crucial to assess your situation and consider all available options, including bankruptcy, if necessary.
Should You Declare Bankruptcy?
If your credit card balances, personal loans, and other unsecured debts have grown to the point that you can’t realistically repay them, bankruptcy might be a solution.
Bankruptcy provides an automatic stay. When you file bankruptcy, your creditors are notified, and all actions against you stop. This includes lawsuits, wage garnishments and collection calls and letters.
Bankruptcy clears unsecured debts. Most unsecured debts, including credit card debt, payday loans, tax debts, lines of credit, and unpaid bills, can be eliminated through bankruptcy.
Bankruptcy can help balance your budget. By eliminating problem debt, your monthly payments are much lower, helping you get a fresh start.
While bankruptcy can offer relief from certain debts, it’s not a cure-all solution. There are important limitations and situations where other options may make more sense.
Bankruptcy does not get rid of all types of debts. If most of your debts are not dischargeable in bankruptcy (like student loans less than 7 years old, alimony or child support) or are secured debts (like a mortgage or car loan), bankruptcy won’t help.
Bankruptcy can be expensive. If you have a good income, you must make surplus income payments. You may lose non-exempt assets when you file bankruptcy.
Some other considerations:
Employment: Bankruptcy generally does not affect your current employment unless you are bonded or hold certain professional designations.
Joint Debts: Joint debts complicate matters in bankruptcy, as bankruptcy doesn’t eliminate the other person’s responsibility for the debt, potentially leaving your co-signer or joint account holder solely responsible for the full amount owed.
Second Bankruptcy: Filing for a second bankruptcy in Canada has more severe consequences, including a longer discharge period (typically 24 to 36 months instead of 9) and the bankruptcy remaining on your credit report for 14 years instead of 6 or 7. A consumer proposal is often a better option than a repeat bankruptcy.
Credit counselling: Your trustee will provide two free credit counselling sessions as part of your bankruptcy. These sessions will teach you how to repair your credit, manage your budget and make better borrowing decisions to help you avoid debt problems going forward.
What Do Bankruptcies Do to Your Credit?
You may be delaying contacting a Licensed Insolvency because you fear the impact of bankruptcy on your credit rating.
When you declare bankruptcy in Canada, it becomes a part of your credit history. Your credit report will show the date you filed for bankruptcy, the date of discharge, and the debts included in the bankruptcy. Equifax and TransUnion will keep a record of your bankruptcy for 6 years from the date of your bankruptcy discharge.
Filing bankruptcy will lower your credit score, affecting your ability to obtain credit in the future.
While the impact of bankruptcy on your credit report is significant, it’s not permanent. Here are some steps you can take to rebuild your credit after bankruptcy:
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Apply for a secured credit card. These cards require a cash deposit and are easier to get if you have damaged credit, including bankruptcy. Use it responsibly to demonstrate good credit habits.
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Make all payments on time. Consistently paying bills on time is crucial for rebuilding credit.
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Keep credit utilization low. Use no more than 30-35% of your available credit limit. This shows lenders that you are not overly reliant on credit.
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As your credit score improves, apply for an unsecured credit card but follow the same good credit management practices.
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Monitor your credit report. Regularly check your credit report for errors and dispute any inaccuracies immediately.
Is Bankruptcy Your Only Option?
It’s best to avoid declaring bankruptcy if possible – it should only be used as a last resort. Before you decide, discuss other debt solution options with a Licensed Insolvency Trustee (LIT).
The alternatives:
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Consolidation Loan: This involves taking out a new loan to pay off multiple debts, potentially at a lower interest rate. A debt consolidation loan can work if you have good credit, good cash flow, and potential assets to use as collateral, such as equity in your home.
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Credit Counselling: Working with a credit counsellor can help you develop a budget and debt repayment plan. A debt management plan is a good option if you can repay all your debts.
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Consumer Proposal: This is a legally binding agreement where you offer to pay creditors a percentage of what you owe. It is a good alternative to bankruptcy that still protects you from creditor actions. A consumer proposal has less of an impact on your credit score than bankruptcy.
You may hesitate to seek help, fearing you’ll be pressured into filing for bankruptcy immediately. We believe that filing for bankruptcy should be a considered decision, not a rushed process. We want you to consider your options carefully, understand the bankruptcy process and ensure you are comfortable with your decision.
Deciding when to declare bankruptcy is a complex and personal decision. While bankruptcy can provide a fresh start for those overwhelmed by debt, it’s not the right solution for everyone.
Contact us today to discuss the solutions available to help you regain control of your finances and work towards a debt-free future.
