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Bankruptcy or debt consolidation: which is best for me?

Posted on 4 August 2021

Both filing bankruptcy and getting a debt consolidation loan have their places when it comes to gaining debt relief. Debt consolidation is the process of taking out a new loan that condenses a number of other existing loans, often making paying back your debt more manageable through a single monthly payment. Bankruptcy, on the other hand, is the government backed process of assigning your non-exempt assets over to a bankruptcy trustee in exchange for the clearance of your debt. Both bankruptcy and debt consolidation have their respective pros and cons – so, bankruptcy or debt consolidation: which is best for me?

What is bankruptcy?

In Canada, filing bankruptcy is the legal process of surrendering your non-exempt assets over to a Licensed Insolvency Trustee. Your trustee will use these assets towards repayment to your creditors of any outstanding debt you have. This is in exchange for the clearance of your debt once you are discharged from bankruptcy, and the opportunity for a fresh financial start. Another advantage of filing bankruptcy is a stay of proceedings. This is a legal block on creditors from contacting you or pursuing legal action like a wage garnishment against you. A stay of proceedings is automatically generated once you file bankruptcy. At Spergel, unlike other bankruptcy trustee firms, you will be assigned your very own bankruptcy trustee to walk you through each step of the process.

What are the advantages of bankruptcy?

Simply put, there are a number of key advantages of filing bankruptcy in Canada, which can be summarized as follows:

  • A fresh financial start, free from overwhelming debts and creditors
  • All unsecured debts are included when filing bankruptcy
  • A stay of proceedings, which means creditors are no longer able to contact you once bankruptcy is filed
  • Bankruptcy is the cheapest form of debt relief, especially if you do not have non-exempt assets
  • Creditors are compelled to comply by Canadian law
  • Bankruptcy is legally enforced by the Canadian government

What are the disadvantages of bankruptcy?

Bankruptcy does have a number of down sides which should be considered before moving forward with the process. The disadvantages of filing bankruptcy include the following:

  • Not all debts are covered by bankruptcy, including secured debts like mortgages and child support
  • Your credit report will be impacted for six years following discharge from bankruptcy
  • Your credit cards must be surrendered when filing bankruptcy
  • Bankruptcy may impact your employment, depending on your role
  • You must surrender any non-exempt assets, including property equity, investments, and tax refunds

What is debt consolidation?

Debt consolidation has a number of different forms, from debt consolidation loans to filing a consumer proposal. It is ideal for those with multiple debts who wish to condense them into one manageable monthly payment, lowering and simplifying payments. Often, it is possible to get a lower interest rate too. Here are the primary methods of debt consolidation:

  • A debt consolidation loan is a new loan that is taken out to condense multiple existing debts into one monthly payment, often spread across a longer time period to allow more affordable payments.
  • A debt management plan is typically offered by a credit counselling agency to consolidate debts into a monthly payment that aims to have all your debt paid off within three years. Your credit counsellor will negotiate a lower interest rate with your creditors to make this more achievable.
  • A debt settlement program is coordinated by a debt settlement company to negotiate a reduction in debt with your creditors informally. It can risk needing to be escalated to a Licensed Insolvency Trustee for a consumer proposal anyway, so it may be worth booking a free consultation with a bankruptcy trustee to begin with.

A consumer proposal is the only government backed form of debt consolidation in Canada, resulting in one affordable monthly interest-free payment. Requiring a Licensed Insolvency Trustee to file a consumer proposal, your bankruptcy trustee will negotiate with your creditors to reduce your debt by up to 80%. It is ideal if you are unable to take out a debt consolidation loan, and it protects you from creditors while often enabling you to keep your assets.

What are the advantages of debt consolidation?

Debt consolidation has a number of different advantages, namely condensing multiple different loans into one:

  • Just one payment instead of multiple different payments to make
  • A lower likelihood of missing a payment or being late each month
  • A greater chance of a lower interest rate due to having a singular payment
  • Debt often repaid faster due to fixed payments and a clear deadline for the debt consolidation loan
  • Creditors are handled by a credit counsellor as part of a debt management plan or a bankruptcy trustee for a consumer proposal
  • For debt settlement programs, there is a potential for reduced debt and for a consumer proposal, there is often a reduction in debt of up to 80%
  • A stay of proceedings is triggered when filing a consumer proposal
  • You are able to keep your assets without surrendering them
  • You avoid bankruptcy and its consequences on your credit report

What are the disadvantages of debt consolidation?

There are also some downsides to debt consolidation that should be considered before taking on debt consolidation:

  • Creditors can choose not to comply with debt consolidation, unlike bankruptcy (except for a consumer proposal)
  • There may be some upfront fees, including balance transfer fees and closing costs
  • Your total debt does not change overall
  • You may have a high interest rate if your credit rating is poor
  • Tax debts and payday loans are not included on a debt management plan
  • A debt settlement program often has significant upfront fees, and it is an informal agreement that is not guaranteed
  • Your credit report is affected when filing a consumer proposal

Bankruptcy or debt consolidation?

If you are If you are unsure as to whether to pursue bankruptcy or debt consolidation, it is important to carefully review the advantages and disadvantages of both forms of debt relief. Bankruptcy is often considered the last resort when it comes to debt relief as it does have a lasting impact on your credit report. It is well worth exploring alternatives to bankruptcy before deciding which option is right for you. Filing bankruptcy is a personal choice, and it depends on your unique financial circumstances as to which option may be the best pathway. Generally speaking, if you qualify for a debt consolidation loan and can afford the payments, there are fewer consequences than filing bankruptcy. If you are unable to get a loan, bankruptcy alternatives may be considered, including a consumer proposal. Failing that, filing bankruptcy will help to ensure you are cleared from your debts and have a fresh financial start. At Spergel, our reputable bankruptcy trustees will help to review your situation for advice on the best next step – feel free to book a free consultation today. You can also use our debt calculator to see what may be best for you, and what each option could cost.

If you are still unsure as to whether to chIf you are still unsure as to whether to choose bankruptcy or debt consolidation, reach out to Spergel. Our experienced Licensed Insolvency Trustees have been helping Canadians for over thirty years, and we can help you too. Book a free consultation today – you owe it to yourself.

Helpful starting information:

What to Bring to an Appointment

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Your Information

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