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| Generally speaking, besides bankruptcy, debt solutions in Canada include a consumer proposal, debt consolidation, credit counselling, a debt management plan, informal creditor negotiation and budgeting. The best option depends on whether you can repay the full debt, whether you qualify for new credit and whether you need legal protection. |
You may not need to file bankruptcy
Many Canadians who are struggling with debt assume bankruptcy is the only way out. But bankruptcy is one of many options. The right choice depends on income, expenses, assets, debt level, credit score and creditor pressure.
Before deciding, it is worth reviewing all available options with a Licensed Insolvency Trustee. Explore the full range of debt relief options. Learn more about what a Licensed Insolvency Trustee does from the Office of the Superintendent of Bankruptcy.
Consumer proposal
A consumer proposal is a legal debt settlement option administered by a Licensed Insolvency Trustee. It allows you to make an offer to unsecured creditors. The offer may involve paying a portion of the debt in payments over time, extending the time to pay, or both.
A proposal can stop interest on included unsecured debts and stops most unsecured collection action once filed. It may also allow you to keep assets while avoiding bankruptcy. Official details are available from the Office of the Superintendent of Bankruptcy on consumer proposals and the page about creditors contacting you after filing a bankruptcy or proposal.
Debt consolidation
Debt consolidation combines multiple debts into one new loan. It may help if you qualify for a lower interest rate and the payment fits your budget. See the Financial Consumer Agency of Canada page on debt consolidation.
It may not help if the consolidation loan payment will not be affordable, you have poor credit, too much debt, or the consolidation loan will have a high interest rate. It also does not reduce the debt unless a settlement is separately arranged with each creditor. Be particularly careful about a consolidation loan payment that may keep you from paying other necessary expenses or cause you to incur more debt to keep up with the consolidation loan payments.
Credit counselling
Credit counselling can help you understand your budget, spending patterns and repayment options. It may be a good first step if you are unsure how serious the debt problem is. Learn more about getting help from a credit counsellor from the Financial Consumer Agency of Canada.
Some credit counselling agencies can also arrange a debt management plan.
Debt management plan
A debt management plan is an arrangement made through a credit counsellor with your creditors. It usually combines debt payments into one monthly amount. In some cases, interest may be reduced or stopped. Usually, you repay the full debt in a debt management plan, and it will impact your credit rating as an R7 much the same way as a consumer proposal. Information about how long details stay on your credit report is available from the Financial Consumer Agency of Canada.
This can be a good option when you can afford full repayment but need support and structure.
Informal creditor negotiation
You can sometimes contact creditors yourself to ask for lower payments, temporary relief or a settlement. This may help if you are only slightly behind or have a lump sum available and are able to document the agreement well so that the creditor does not come back on you for the remaining amount.
The risk is that all creditors do not have to agree, and informal negotiation may not stop collection action.
Budgeting and repayment strategy
If the debt is still manageable, a budget and repayment strategy may be enough. This may include paying high-interest and/or low-balance debt first, reducing expenses and avoiding new credit.
This is most effective when you can pay more than the minimum payment and the balances are falling every month.
How to decide
If you can repay the full debt without incurring more debt, then start with budgeting, consolidation or credit counselling. If you can afford payments but cannot afford to repay the full debt, then consider a consumer proposal. If no payment plan is realistic, then bankruptcy may need to be compared.
The main takeaway
Bankruptcy is not the only debt solution in Canada. A Licensed Insolvency Trustee can help you compare alternatives and understand whether a consumer proposal, consolidation, credit counselling or another option makes sense.
Frequently asked questions
What is the best alternative to bankruptcy?
For many people, a consumer proposal is the main legal alternative, but it depends on affordability and creditor acceptance.
Can I avoid bankruptcy with debt consolidation?
Possibly, if the loan rate is lower and the payment is affordable.
Do I need a trustee if I do not want bankruptcy?
Yes, speaking to a Licensed Insolvency Trustee (LIT) can still be helpful because they do not charge for consultations, there is no obligation to proceed, and the LIT can help you understand the advantages and disadvantages of all your options so you can make an informed decision.
Speak with a Licensed Insolvency Trustee
Speak with David Sklar & Associates for a confidential review of your debt, income, assets and monthly budget. A Licensed Insolvency Trustee can explain your options and help you choose a realistic next step. Book a free consultation today.
