Avoid drastic all-or-nothing approaches when dealing with debt

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The first thing you might think about when you feel overwhelmed by debt and don’t know how to get rid of it is going bankrupt — and no one would fault you for thinking that.

Bankruptcy is the word people know, and depending on their experience, going bankrupt is either a fresh start or a last resort for someone in financial trouble. But there are a lot of alternatives to bankruptcy in Canada that you should consider before committing to a legal process that’s extremely difficult to back out of should your situation change.

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First things first, no one sets out to get into debt, and it’s one of the last things anyone wants to talk about. Navigating repayment when things get difficult means facing your debts head-on all alone. Or does it? The various debt-consolidation options, settlements and structured repayment plans through non-profit credit-counselling agencies all aim to help support your efforts to honour your obligations with interest relief and/or balance reduction.

After explaining someone’s options to them, they often ask me why they should forge ahead with repayment when they can just walk away by going bankrupt. Everyone’s situation is different, and there are times when bankruptcy is the best option for a bad situation. But if you have assets and any ability to repay even part of your debt, bankruptcy isn’t the get-out-of-jail-free card that everyone thinks it is.

Bankruptcy is a legal process through the courts, which becomes a permanent, searchable record. In addition, it may not deal with all your debts and is extremely hard on your credit. Normally, only unsecured debts are included in a bankruptcy filing, but student loans less than seven years old, court-imposed fines, certain judgments, government overpayments and child-support arrears will survive bankruptcy and still need to be paid.

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Then, depending on your level of income, especially if it goes up before you complete the discharge process, the bankruptcy note remains on your credit file for a total of eight to nine years. Obtaining credit during that time comes with higher interest rates, stricter terms or conditions and a much higher risk of rejection altogether.

The base fee to assign yourself into bankruptcy is currently close to $2,000, and while that might mean paying your creditors less than entering into a repayment program, it can be hard on your assets. The province you live in, how much equity you have in your home and how much you earn will all determine if you get to keep your home if you go bankrupt, or if you will need to pay an additional amount to your creditors before obtaining your discharge. The same applies to your car and any expensive household goods.

In addition, all joint bank accounts are in jeopardy of being seized and any joint loans or credit cards fall on the co-borrower or co-signer to pay. The same applies to funds set aside for your kids in bank accounts in your name but in trust for the kids as well as registered education savings plans (RESPs) — they will be seized as well.

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For example, if you have a one per cent ownership stake in your parents’ home for estate-planning purposes, should you declare bankruptcy, their home will also be factored into your bankruptcy filing. That alone could preclude you from going bankrupt. Not everyone’s situation allows them to declare bankruptcy without significant consequences that may best be avoided.

Along with repercussions for your assets, there may be additional repercussions for your employment if you opt for a bankruptcy filing. If you need to be bonded for work or maintain specific clearances as a condition of employment, or work in any aspect of financial services or insurance, declaring bankruptcy can impact your job. In addition, if you’re in business for yourself, you’ll be advised by your trustee on what you need to declare to your customers.

As a result, assigning yourself into bankruptcy is a big step and one that should not be taken lightly. Your creditors need to agree to the terms of your bankruptcy and will only do so if you don’t have a reasonable ability to repay what you owe.

If you can repay even part of what you owe, do yourself a favour and explore your options. Contact an accredited non-profit credit counselling organization in your area for an impartial review of your budget and financial situation. One appointment will help you determine what questions to ask and where to turn for next steps.

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It could be your financial institution for a consolidation loan, maybe an accounting professional, a therapist to deal with compulsive spending or you might choose to remain with your credit counsellor for a repayment program or debt settlement.

The point is that there are private options that will allow you to regain control of your finances, protect your assets and employment, improve your credit rating and work towards a stable financial future for you and your family. The cost might be a few years of repaying what you owe, but the result is priceless.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 27 years.

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