Credit counselling or bankruptcy – which is best?

Posted on 17 September 2023

Written by Ashvin Sharma

Dealing with overwhelming debt can be a stressful and challenging experience, but this happens to more Canadians than you might think. Fortunately, there are options available to help individuals regain control of their financial lives. Two key approaches for addressing excessive debt in Canada are credit counselling and bankruptcy. Choosing between these two options requires careful consideration of your unique financial circumstances and goals. Each of these forms of debt relief have different perceptions – some of which may be inaccurate. Before you proceed with a form of debt relief, it is important to have all the facts so that you can make the right decision for you and your financial circumstances. At Spergel, our Licensed Insolvency Trustees will help to review your finances and ensure you are informed on all the possible pathways to a fresh financial future. In this article, we will explore credit counselling and bankruptcy, how each of them work, their key differences, and which might be the best choice for you. So, credit counselling or bankruptcy – which is best?

What is credit counselling?

Credit counselling is a service designed to help individuals manage their debts more effectively while avoiding bankruptcy. Credit counsellors can help you to consolidate your debts into a single monthly payment that is more manageable. Although they cannot compel creditors to oblige legally (unlike Licensed Insolvency Trustees), they can work with your creditors to negotiate lower interest rates, potentially reducing the overall cost of your debt. Another role of credit counselling is to provide financial education and budgeting guidance to help you develop better money management skills. They can teach you how to create a budget, save money, and avoid future debt problems. In some cases, credit counsellors may recommend a debt management plan (DMP). In a DMP, you make monthly payments to your credit counselling agency, which then distributes the funds to your creditors according to the negotiated terms. While taking on a debt management plan may affect your credit score temporarily, it typically has less severe and shorter-term consequences than bankruptcy.

What is bankruptcy?

Bankruptcy is the legal process of assigning any non-exempt assets you might have over to your Licensed Insolvency Trustee in exchange for the clearance of your unsecured debt. Your assets are then sold, with any proceeds going towards the repayment of your debts. Bankruptcy allows both individuals and businesses to eliminate or restructure their debts under the Bankruptcy and Insolvency Act. Although many Canadians think that filing bankruptcy means you will lose all your assets, this is not true. Canadian bankruptcy laws provide exemptions that protect essential assets like your home and personal belongings up to a certain threshold. See, for instance, Ontario bankruptcy exemptions. Bankruptcy is the best pathway to a fresh financial future, allowing you to discharge most unsecured debts, except some student loans, court-ordered fines, and child support payments. It is important to note that filing bankruptcy has a severe and long-lasting impact on your credit score. A bankruptcy record remains on your credit report for several years, making it challenging to obtain new credit during that time. At Spergel, our experienced Licensed Insolvency Trustees can help you to rebuild your credit score.

Credit counselling or bankruptcy – what are the differences?

If you are considering either of these options for debt relief, it is essential to understand the differences:

Credit counsellingPersonal bankruptcy
Types of debt eligibleBasic consumer debts, including credit card debts, lines of credit, and loans, but NOT tax debts as the CRA will not work with credit counsellorsAlmost all types of unsecured debt, including credit card debt, payday loans, overdrafts, tax debts, student loans (if over seven years old), etc
Debt negotiationsCredit counselling is an informal plan – generally speaking, you need to pay 100% of your debt. Creditors may or may not agreed to reduce your interest rate. Creditors do not need to agree to negotiate in credit counsellingFull forgiveness for all unsecured debts, with rare exceptions. You do not need your creditors to oblige to file bankruptcy
Monthly paymentsUsually higher monthly payments than other forms of debt relief, as 100% of the debt will need to be repaid. There will often be fees for debt management plans, as well as the debt repayment – organizations are free to set their own pricesPayments are usually based on your income. Most bankruptcies require you to pay the administration costs or fees as part of a manageable payment plan. All fees are managed by the government
Eligibility criteriaYou need to be able to repay your debts within 5 yearsYou need to be insolvent in order to file
Creditor protectionCreditors will usually stop contacting you while your plan is in good standing, but there is no guarantee. Credit counsellors do not have the authority to stop wage garnishments or collectionsBankruptcy offers legal protection from your creditors via a stay of proceedings. This puts an end to wage garnishments, bank account freezes, and liens on property.
Asset protectionCredit counselling does not cover mortgages, vehicles or other secured debts, so you need to manage them separatelyMost people keep their assets, including RRSPs, up to a certain value. If you continue to stay current on payments for a car or mortgage, you can keep those too
Time to being debt freeThe length of a credit counselling repayment plan will depend on the size of a debt, up to a maximum of 5 years. You can repay early if you are able to do soMost people are discharged from bankruptcy after 9 months. If your income is higher, it could last up to 21 months; if you have declared bankruptcy before, it could last for 2 to 3 years. Bankruptcy is usually the quickest and cheapest way to eliminate your debts
Impact on credit ratingYou credit history will likely reflect a R7 rating (R9 is the most severe) for 2 years after completion. You may be able to access new credit, although this could be challenging at some institutionsBankruptcy is likely to drop your credit score to the lowest possible rating (R9) at most Canadian credit bureaus. This will be noted on your credit report for 6 years following discharge. This can make it difficult to secure credit in the future
Professional guidanceNo specific training or qualifications required to become a credit counsellorLicensed Insolvency Trustees are the only professionals legally able to file a bankruptcy
CostsCredit counsellors usually charge a fee of 10-15% of your debts, plus you need to repay the cost of your debtsA minimum cost of $1,800, due in 9 monthly instalments of $200. If you do not have assets and earn below the government income threshold, you will only pay this amount

Credit counselling or bankruptcy – which should you pick?

Choosing between credit counselling or bankruptcy entirely depends on your unique financial situation, and what you are trying to achieve. Credit counselling may be more appropriate if you have a reliable income and can afford to make reduced, consolidated payments to your creditors. This option is often ideal for those who want to avoid the long-term impact of bankruptcy on their credit. You probably also have a small, manageable debt (less than $10,000). On the other hand, bankruptcy may be the best choice if you have an overwhelming amount of unsecured debt, minimal income, and no other viable means of repayment. It can provide relief when there is no realistic way to manage the debt through credit counselling or other means. Seeking help early is essential, as it can prevent your financial situation from deteriorating further and provide you with the best chance of regaining control over your finances. Consulting with a Licensed Insolvency Trustee is an important first step – they are the only professionals in Canada legally able to file all forms of debt relief, and are therefore well placed to inform and advise you on your options.

What are the alternative options to credit counselling and bankruptcy?

After reviewing the characteristics of both credit counselling and bankruptcy, you might feel that neither option is appropriate. There are, in fact, multiple bankruptcy alternatives that may work better for you:

  • Consumer proposal – filing a consumer proposal is a legal form of debt settlement that you work on with a Licensed Insolvency Trustee. It is process of working together to establish an affordable monthly repayment figure, which your trustee then proposes to your creditors. Often, it can reduce your unsecured debt by up to 80%. If accepted, you are only committed to making your affordably monthly payments for a period of up to five years, and your remaining debt is cleared. It is often more effective and cheaper than credit counselling, and a stay of proceedings offers full protection from your creditors. At Spergel, we have a 99% acceptance rate on any consumer proposals we file.
  • Debt consolidation loan – a debt consolidation loan is a new loan that is taken out to condense multiple other loans. It has the advantage of simplifying your payments into one, and often allows for a reduction in the overall interest rate that you pay. You need to qualify for a new loan, and must remember that it will not reduce the overall amount of debt that you owe.

How to get started with credit counselling or bankruptcy

It can be difficult to make a decision on how to get out of debt, but the best first step to take is to speak to a Licensed Insolvency Trustee. As they are the only professionals legally able to file all forms of debt relief, they will be able to assess your situation and advise you on a suitable form of debt relief. Generally speaking, credit counselling is best suited to individuals with smaller, manageable debts that know they will be able to repay them in full. If you are have larger debts that you know you cannot make payments on, bankruptcy could be the best option. It is not your only option, however – a consumer proposal can be more affordable for some. Licensed Insolvency Trustees are licensed to file bankruptcies and consumer proposals, as well as guiding individuals through the sometimes intimidating process, dealing directly with creditors on their behalf. Unlike other bankruptcy firms, at Spergel, you are assigned your very own Licensed Insolvency Trustee to walk you through the entire debt relief journey, instead of passing you from person to person.

If you are confused on whether credit counselling or bankruptcy is best for you, book a free consultation with Spergel. Our experienced Licensed Insolvency Trustees have been helping Canadians to gain debt relief for over thirty years. We will help to inform you of your options, and explore different solutions to deal with your debt. Reach out today – you owe it to yourself.

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Ashvin Sharma

Ashvin Sharma is a Chartered Insolvency and Restructuring Professional and LIT (Licensed Insolvency Trustee) overseeing all of Spergel's offices in the Greater Vancouver Area and British Columbia. He is also our resident expert on homeownership debt and health debt. In his spare time, Ashvin loves to play sports, spend time with family and friends, and serves as a volunteer coordinator for "Free-Them", a Canadian organization committed to raising awareness about human trafficking.

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