Filing bankruptcy gives you rapid protection from creditors and a refreshed financial start by brushing out specific debts like credit card debt, medical debt, and payday loans. So, when you’re in financial hardship, declaring bankruptcy may sound like the only way out, but there are times when filing for bankruptcy in Canada isn’t your best action method. Many factors must be considered before moving forward with such a big decision. If you don’t consider your options or consider how bankruptcy could affect other areas of your life, you could find yourself in a more significant dilemma than where you started. Regardless of your situation, the bankruptcy process has long-term implications that can impact your credit and your personal life, and it’s something that should always be turned to as a last resort.
If you’ve been asking yourself, “Is Bankruptcy the Best Option for me?” take some time to assess your financial situation, and if any of these points apply, filing bankruptcy may not be suitable for you.
Secured debts make up the majority of what you owe.
Bankruptcy does not include all kinds of debts. There are both secured and unsecured debts. Secured debts are supported by collateral or an asset, such as a mortgage or vehicle loan. In contrast, unsecured debts, like credit card balances, medical bills, and collection amounts, do not depend upon assets. Secured debts make up the majority of what you owe.
Declaring bankruptcy is not the best solution if most of your debts are secured. Assets like a home or vehicle pledged as security for a loan will be sold. However, bankruptcy discharges unsecured debt. Bankruptcy also does not discharge student loans under seven years old, kid support or marital support payments, government overpayments, court-ordered fines, or restitution payments.
So before considering applying for bankruptcy, assess your liabilities and determine which of your debts are secured. If most of your debts fall into secured debts, declaring bankruptcy may only clean your slate if you give up most of your assets. Hence, you can look into other alternative options.
Your debts have co-signers
If you’re considering bankruptcy, you must review all your debts to check if anyone has co-signed for you. If you have co-signed or joint debts, speak to the other person first, as your bankruptcy filing influences their credit rating and finances.
Co-signers are responsible for the loan if the primary borrower cannot repay it. If the co-signer doesn’t have the means to take over the payments, their credit rating is affected, and the creditor has the legal right to hunt them for payment. If one person files for bankruptcy, the entire obligation for compensating the total debt balance falls on the remaining co-signer or joint borrower.
So if you are joined on a debt with someone, or someone has co-signed on a loan for you, and you can’t pay it back, you may want to think twice about bankruptcy, as it affects either your or your co-signer credit rating.
Bankruptcy Is Unaffordable
Yes, you have to pay to go bankrupt. Many consumers do not know about the costs and fees of declaring bankruptcy. To develop through the legal process, you should come up with sufficient cash to cover the costs of a Trustee’s services and filing fees. Bankruptcy costs in Canada vary based on the size and income of your household.
If your income is $200 or more above the set government standard, you must make extra income payments on top of the fee you already pay. A LIT calculates what these surplus income payments need to be, but 50% of your excess earnings go to your creditors. When you declare bankruptcy, your assets over a defined level or exemption are sold, and the proceeds from the sale are distributed to your creditors by your LIT. Assets such as your home, vehicles, cash, and inheritances are a part of liquidating your assets.
Hence, ultimately, declaring bankruptcy could cost you more than expected.
Bankruptcy impacts your occupation.
There are better options than bankruptcy if you work in certain occupations. If you work in finance, or law enforcement, require a high-security clearance, need to be bonded, or are licensed by a professional association, bankruptcy could endanger your occupation. Filing for bankruptcy could also deter you from moving into one of these occupations in the future.
Temporary Financial Hardship
Financial hardship arrives in tides. Although you may be living on the edge, your financial situation can improve in the next few weeks or months with a new job, a promotion, or an investment that pays off.
So if you’re asking yourself if bankruptcy is a good choice for you, you have to consider whether your financial problems are temporary or not. For example, will you qualify for unemployment benefits if you recently lost your job? Do you have a reasonable possibility of getting a new job in a few months? Do you anticipate more cash flowing in over the next year or so?
If you notice that your current hardship is temporary, you can wait and not enter the bankruptcy process immediately. If your circumstances improve soon, you may be in a more suitable position to pay down your debts.
Availability of alternative options for Bankruptcy
Bankruptcy is not the only way out of your financial suffering. Depending on your financial situation, you could be better off in the long run with various alternatives, such as:-
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Debt Consolidation Loans
The first option to look at to enhance your debt situation is often a debt consolidation loan. Consolidation loans are usually used to pay off high-interest consumer debts. The result is a single monthly payment that’s more comfortable to concentrate on.
A consumer proposal is a legal arrangement that crystallizes all your unsecured debt payments and only needs you to repay a portion of what you owe based on your income and what you own.
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Debt Management Programs
A Debt Management Program (DMP) is another kind of debt consolidation in that you consolidate all your debts into a single one, so you have one payment to make each month. But, a DMP doesn’t involve borrowing money. With a DMP, the credit counseling agency you choose to work with contacts your creditors and arranges a plan to repay your unsecured debts in full at a lower interest, or with no interest.