Bankruptcy/Options other than Declaring Bankruptcy
|
|
Can I solve my debt problem by making a plan with the collection agency?
Maybe.
This works well if you have only one, or a few debts that are past due. For example: if you owe the creditor $2,000, you could offer to pay them $250 from each of new paycheque, until the debt is paid off.
If you have numerous creditors, this option becomes increasingly difficult as if even one creditors does not cooperate, you could still face legal action.
For more information about this option and whether it can work for you, see: Alternatives to Bankruptcy in the external resources.
My debt problem is quite large. I owe many thousands of dollars to more than one creditor, and I do not think that I can make payment arrangements with all of them? Is there anything I can do?
If you have debts to many different creditors, you might be able to replace several debts with one by getting a “consolidation loan.” This is an alternative to declaring bankruptcy.
A consolidation loan is a loan from a bank (or other financial institution). It allows you to pay off most or all of your creditors at the same time, leaving you with only one outstanding debt, the consolidation loan. For example, if you have unpaid balances on five credit cards, you may be able to get a consolidation loan from your bank to pay off all five. You would then have a single payment to make each month (to the bank).
This solution is often considered in cases wherein the debts are not too large and your future income is secure.
This type of loan is often at an interest rate that is lower than what you are paying to your creditors (especially if your debts are credit card debts). This can mean big savings in interest charges. However, if the interest rate to be charged by the bank is too high, this solution is not the ideal one.
If you get such a loan and it is secured, you should only do this if you are sure you can make the payments, so that you do not lose the property that you have listed as security (such as your house).
For more information about this option and whether it can work for you, see Alternatives to Bankruptcy in the external resources.
You may also wish to contact a trustee in bankruptcy for advice. For more information about the role of trustees, see here.
I have heard about something called a “consolidation order”. How is this different from a “consolidation loan”?
A “consolidation loan” is a loan from a financial institution (such as a bank) that allows you to pay off most or all of your creditors at the same time, leaving you with only one outstanding debt, the consolidation loan. You make these arrangements on your own.
A “consolidation order” on the other hand, is a formal legal arrangement governed by Part X of the Bankruptcy and Insolvency Act (also known as the Orderly Payment of Debts Program). More specifically, it is an order from the Provincial Court that combines all your debts into one and determines the amount that you must pay to the Court on a periodic basis. The Court will then ensure that payments are made to your creditors.
Consolidation orders are only available for personal debts (not business debts) and are only available in provinces that have asked for this part of the Bankruptcy and Insolvency Act to apply to them (for example: Alberta, Saskatchewan and Nova Scotia). Only debtors who live in the participating provinces may apply for a consolidation order.
For more information about this option and whether it will work for you, see: Orderly Payment of Debts.
You may also wish to contact a trustee in bankruptcy for advice. For more information on the role of a trustee, see here.
I still owe $50,000. I’d rather not deal with the collection agency myself as I have not had success with that in the past, and I really don’t want to go to court. Do I have any other options?
A consumer proposal (also known as a “Division II” proposal) is a formal procedure governed by the Bankruptcy and Insolvency Act.It is only available to individuals (not businesses) owing less than $250,000 (not including the mortgage on their home). If you own more than one home (or a home and a cottage) only the mortgages on your principal residence may be excluded.
With a consumer proposal, you do not directly negotiate with creditors or collection agencies. Instead, you must work with a trustee in bankruptcy to:
- put together an offer to pay your creditors a percentage of what you owe them over a set period of time; and/or
- extend the time you have to pay off your debts.
You then make payments to the trustee, and the trustee uses the money to pay your creditors.
The advantages of a consumer proposal are that you retain all of your assets, actions against you by unsecured creditors (such as wage garnishments) will be stopped, and you do not have to declare bankruptcy. Also, a consumer proposal is a simpler process than a Division I proposal.
For more information about this option and whether it will work for you, see Alternatives to Bankruptcy in the external resources.
You may also wish to contact a trustee in bankruptcy for advice. For more information on the role of a trustee, see here.
I owe over $250,000 and therefore cannot do a consumer proposal. Do I have any other options?
For debts over $250,000, you can submit a “Division I” proposal to your creditors. This, too, is a formal process governed by the Bankruptcy and Insolvency Act (BIA). It is available to both individuals and businesses, and there is no limit with respect to how much money is owed.
With a Division I proposal, you do not directly negotiate with creditors or collection agencies. Instead, you must work with a trustee in bankruptcy to:
- put together an offer to pay your creditors a percentage of what you owe them over a set period of time; and/or
- extend the time you have to pay off your debts.
You then make payments to the trustee, and the trustee uses the money to pay your creditors.
You should know, however, that if the Division I proposal is rejected by either your creditors or a court, you will automatically be bankrupt. For this reason, you may wish to seriously consider one of your other options first.
For more information about this option and whether it will work for you, see Alternatives to Bankruptcy in the external resources.
You may also wish to contact a trustee in bankruptcy for advice. For more information on the role of a trustee, see here.
The debts that I am having trouble paying are business debts (not personal ones). Do I have all of the same options as someone dealing with personal debts?
No. Business debts are not eligible for either consolidation orders or consumer proposals.
You can, however, still attempt to do one or more of the following:
- directly negotiate a repayment plan with the creditors or collection agency;
- apply for a consolidation loan at a financial institution (such as a bank); or
- submit a Division I proposal.
If you negotiate with a creditor or obtain a consolidation loan, be sure you understand what you are signing. For example: you may be asked to sign a personal guarantee: such a document has serious legal consequences and you should obtain legal advice before signing one.
You may also wish to contact a trustee in bankruptcy for advice. For more information on the role of a trustee, see here.
What happens with my business if I submit a Division I proposal (on behalf of the business)?
If your proposal is accepted, your company will be given the time to do whatever needs to be done to keep the business solvent. Submitting a proposal stops all legal actions by secured and unsecured creditors, and, in the case of an incorporated company, also creates an automatic stay of proceedings against the Director of the company.
If you are worried that your creditors will force you into bankruptcy before you get a chance to file a Division I proposal, you can file a Notice of Intention to File. This acts as a stay of proceedings as soon as it’s filed. Once you have filed such a Notice of Intention, the Division I proposal itself must usually be filed within 30 days.
You should know, however, that if you choose to submit a Division I proposal and your creditors reject the proposal, your business will immediately go into bankruptcy.
I have heard that if I declare bankruptcy, I’ll have my life back in 21 months or so. If so, why would I choose any of these other options?
Filing for bankruptcy can have several advantages, including the following.
- It protects from collection action, legal action and wage garnishees.
- It eliminates a person’s unsecured debts.
- It can be relatively quick.
- It can be less expensive than the other options.
However, there are several reasons for which a person may want to avoid declaring bankruptcy, including the following.
- In a bankruptcy you may lose certain assets (such as valuable cars, houses, certain RRSPs), whereas in a proposal you can retain your assets.
- Bankruptcy requires you to keep detailed records of your income and expenses while you remain bankrupt.
- There is a difference in the way increases to your income will be treated. In a bankruptcy, each month you must report your income to your trustee. If your income goes up in that time period the amount you must pay will also increase. With a proposal, on the other hand, if your income increases after the deal is done your payments stay the same.
- A bankruptcy is not automatically over in 21 months. For example:
- If you have significant surplus income, or you are a repeat bankrupt, your bankruptcy may not end in 21 months. Each year, the government determines how much you are allowed to earn while bankrupt (depending on the size of your family and some other factors). If you have significant surplus income, your bankruptcy will likely be extended.
- If you owe more than $200,000 of personal income tax debt, representing 75% or more of your total unsecured debt, your bankruptcy will not end in 21 months.
- If you have been bankrupt before, your bankruptcy will not end in 21 months.
- If a creditor is of the opinion that you could have solved the issue with a consumer proposal instead, that creditor may oppose your discharge.
- For some, there may be stigma (real or perceived) associated with bankruptcy.
- Bankruptcy cannot deal with some debts (s. 178 BIA). For example: certain student loans, maintenance and debts obtained through false pretenses.
How do these various options affect my credit rating?
It is important to note that, by the time you have reached this point, your credit rating may already be severely compromised. Restoring your credit rating will not be automatic.
When you enter into one of these arrangements, the Credit Bureau will be notified. The matter is recorded and you will be assigned a lower credit rating score. The matter will remain on your credit record for several years after complete repayment.
All of these options have a long-term effect on your credit rating. In the end, it cannot be said that one necessarily has a better, or worse, effect than another. It depends on the circumstances. For example:
- Assume you have a debt problem and you address the issue with a consolidation order that has a five year repayment plan. When you are done, your lowered credit rating score will remain for 2 years after repayment. Total number of years: 7.
- Assume you have a debt problem and you address the issue with a consumer proposal that has a five year repayment plan. When you are done, your lowered credit rating score will remain for 3 years after repayment. Total number of years: 8.
- Assume you have a debt problem, you address the issue with bankruptcy, and you are discharged after 9 months. After your discharge, your lowered credit rating score will remain for 6 years after discharge. Total number of years: about 7.
- Assume a second bankruptcy. After your discharge, your lowered credit rating score can remain for up to 14 years after discharge.
The issue of the effect on your credit rating is a complex one. Consider contacting a trustee in bankruptcy for advice. For more information on the role of a trustee, see here.
This does not mean that you cannot obtain any credit during, or after, this time, but it does make it more difficult. No one is ever required to give you credit. Your ability to obtain and use credit after your debts are repaid depends on your ability to convince lenders of your ability to repay the new debt. To help in this regard, ensure that your credit record is kept updated and make sure that you keep all documents relating to this matter for reference by future lenders.
More Information
| Other FAQs in this section | ||
|---|---|---|
| Debt Control in General | Options other than Declaring Bankruptcy | Declaring Bankruptcy |
This page was last updated in November, 2009.
Back