Avoid filing bankruptcy: the best alternatives

Posted on 8 January 2023

Written by Chris Galea

Although a last resort for most Canadians when it comes to filing debt relief, bankruptcy is essential for some in bringing about a fresh financial future. Understandably, you may be intimidated by the process and want to avoid filing bankruptcy. While it clears all of your unsecured debts, bankruptcy does bring about some drastic consequences including a negative impact on your credit score and it can make securing future credit challenging. For this reason, in this article we discuss how you can avoid filing bankruptcy by exploring some other options beforehand. In fact, there are plenty of good bankruptcy alternatives in Canada. Below, we explore the best ways to avoid filing bankruptcy and the pros and cons of each alternative, and share how you can gain help if you are struggling financially.

What are the best ways to avoid filing bankruptcy?

There are a few simple ways you can look to avoid filing bankruptcy, as well as some bankruptcy alternatives:

Sell your assets

By selling your assets first, you may be able to pay off your credit and subsequently protect your credit score. If your creditors are aware that you are trying to do this, they will typically allow you some time in order to try to repay your debt. Of course, this option requires you to have assets in the first place, and selling assets in this way usually means you will need to sell them at a reduced price. Although it can see you pay off your debt in full and solve your situation in the short term, you should be mindful that this is only a temporary situation. If you have been struggling with your debts in the longer term, you should speak to a Licensed Insolvency Trustee who will be well placed to advise you on a longer term form of debt relief.

Look at getting a debt consolidation loan

A debt consolidation loan is a great way to avoid filing bankruptcy, and allows you to avoid the consequences of doing so. A debt consolidation loan is a new loan that you take out to condense a number of separate debts. It has the advantage of simplifying your debt and making it much more manageable, and it can often reduce or eliminate your interest rate completely. Your credit score and income will determine whether or not you qualify for a debt consolidation loan – in some case, a co-signer may be required, which could raise the interest rate. The only downsides to a debt consolidation loan are that sometimes it replaces one debt for another, meaning that debt payments can still be overwhelming. You are also unable to negotiate the amount of your debt in order to reduce your payments, which may make it an inappropriate form of debt relief for those looking to reduce their overall debt.

Attend credit counselling sessions

Credit counsellors are typically non-profit organizations that help you to arrange a repayment plan on your debt for your creditors. Credit counsellors cannot often reduce the overall amount of debt owed, and will instead work to prepare a plan with you to make your debt repayments over a reasonable amount of time. They can sometimes reduce the overall interest rate. Credit counsellors can essentially offer free advice on your debt, although sometimes they will include a 10% fee as part of your repayment plan. Despite being a way to avoid filing bankruptcy, given that credit counselling repayment plans do not mean you repay your debt on the original terms, it will still have a negative impact on your credit report.

Negotiate with your creditors

Another way to avoid filing bankruptcy is to negotiate a one-time settlement with your creditors. This repayment can be based on your ability to pay, although will often require a lump sum payment as part of the bargain. Doing so can mean your creditors agree to accept a reduced amount of repayment. Creditors will require evidence of your financial circumstances and an understanding of your inability to repay your debt in full. You will need to prepare how to approach your creditors and know how to negotiate with them before beginning a settlement. Do note that your creditors have no obligation to agree to an informal negotiation, and there is no guarantee on your agreement. You should be sure to capture any agreement in writing.

File a consumer proposal

One of the most popular forms of bankruptcy alternative is a consumer proposal. A consumer proposal is a legal negotiation made with your creditors through a Licensed Insolvency Trustee in line with the Bankruptcy and Insolvency Act. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. A consumer proposal is the legal process of proposing an affordable monthly payment to your creditors – if agreed, it can reduce your overall debt by up to 80%. Consumer proposals also enable you to keep your assets, unlike bankruptcy, and also offer full protection from your creditors via a stay of proceedings. While consumer proposals will impact your credit score, it is less severe than the consequences of filing bankruptcy. At Spergel, we have a 99% acceptance rate on any consumer proposals we file.

What if I need to file bankruptcy?

Often considered a last resort, if none of the above methods that avoid filing bankruptcy are suitable for you, bankruptcy is probably the best option. Essential for some individuals, bankruptcy is the legal process of assigning any non-exempt assets you may have over to your Licensed Insolvency Trustee in exchange for the clearance of your unsecured debts. It is a binding agreement that creditors are obligated to comply with. For most Canadians filing a first time bankruptcy, discharge takes place after around nine months whereby you can enjoy life after bankruptcy. Key advantages of bankruptcy include protection from creditors, which is triggered as soon as you file. There are some setbacks to filing bankruptcy. Bankruptcy obligations mean that you need to share monthly income and expense reports throughout your bankruptcy with your Licensed Insolvency Trustee. You will also receive a severe impact on your credit report, which will reflect for up to six years after your discharge from bankruptcy. Bankruptcy does, however, allow you a fresh financial future so that you can begin to rebuild your credit score and finances.

How do I choose the right form of debt relief?

With so many options and ways to avoid filing bankruptcy, you may well be wondering how to go about choosing the right form of debt relief for you. The best port of call is to book a free consultation with a Licensed Insolvency Trustee. As the only professionals in Canada legally able to file all forms of debt relief, they are well placed for reviewing your financial circumstances and recommending a form of debt relief. It is important to have a professional to help you as they know the industry inside out and can advise you on the best way to approach handling and negotiating with your creditors. They can also advise you on rebuilding your credit score and getting your finances back on track for the long term.

If you have further questions on how to avoid filing bankruptcy, you can book a free consultation with one of the experienced Licensed Insolvency Trustees at Spergel. We have been helping Canadians begin a fresh financial future for over thirty years. You can read our client reviews and learn more about our team for yourself. We will help to inform you, answer your questions, and share recommendations based on your scenario. Reach out today – you owe it to yourself.


Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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