When people run into serious debts beyond what they can handle in Canada, there are several options available to them. One is consumer bankruptcy, which is the province of the Bankruptcy and Insolvency Act. A Consumer Proposal and an Orderly Payment of Debts are other possibilities.
Here is how the bankruptcy process works. If an individual owes more than $250,000 beyond what he owes on his primary residence, he can file a Division I bankruptcy proposal with the Office of the Superintendent of Bankruptcy. If the debt is less than $250,000 he can file a Consumer Proposal. In the case of a Division I proposal, if the creditors do not approve the payment plan or if the court rejects the plan, the person can be placed into bankruptcy. In the case of a Consumer Proposal, the person can voluntarily place himself into bankruptcy, or his creditors can petition to have him placed into bankruptcy.
If you are bankrupt, you have to deliver your credit cards, property and related records to the trustee and attend an examination about the causes of your bankruptcy and how your property is to be disposed in front of a receiver. After discharge, your debts are largely expunged once your property has been distributed. This is why making a solid proposal is so important, because if it is accepted and you can keep to it, you can avoid bankruptcy.
Another option, of course, is to work with a debt settlement company or a debt management program. It’s important to consider the pros and cons of those possibilities before making a proposal to deal with your debts. A debt management program offers you a structured plan fro paying your bets that, in many cases, allows you to pay off your debt more quickly than you might think because of forgiven fees and reduced interest rates. You end up saving money and time, and if you make your program payments on time, your credit rating may even go up. Instead of having to make a bunch of payments each month to all of your creditors, you just pay once a month to your debt management company, and they send out payments to your creditors for you. You also get a monthly statement showing your progress.
However, if you fail to make monthly payments, your creditors will take you out of the program, removing any benefits that you have accrued and putting you back in that same situation. Some people just have more debt than a debt management program can alleviate, because they are generally designed to last a maximum of five years. If your debts are high enough, you might not be able to pay it all off in that time frame, even with cut fees and interest rates. It’s also important to watch out for debt management fees. Some companies are nonprofits but others charge hefty fees without telling you that your monthly payment is not all going to your debt repayment.
Pros and cons of debt consolidation – cont’
Debt settlement has helped many Canadians get out of debt faster than a debt management program can. This involves hiring a settlement company to negotiate lower numbers for payoffs with collectors, personal loans and other open accounts such as credit cards. It’s important to be careful to know that debt settlement is not debt consolidation — you are not taking out a new loan. Rather, you are having one company negotiate lower payoffs with all of your creditors.
The obvious advantage to debt settlement is that you don’t pay as much money — companies often work out one monthly payment that is affordable. You also have less regulation than you would going through a government-managed program like bankruptcy. Finally, there is less risk that you will immediately be thrown into bankruptcy if you can’t meet a payment. A lot of times the settlement companies can negotiate more than 50 percent off your original debt, saving you a ton of money over the long run.
However, if your credit is still good, you will want to stay away from debt settlement. When you settle a debt in this way, the lender can report it for “settled for elss than agreed” or “settlement accepted,” which wreaks havoc on your credit for seven years. If you have poor credit, then debt settlement is definitely something to consider, because your score is already low.