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How to Get Out of Debt without Filing for Bankruptcy

Getting Out of Debt Without Bankruptcy

When you are dealing with substantial amounts of debt, it can feel so stressful. You might see no way to solve your financial pressures. However, there are always things you can do to get yourself out of debt. Filing a bankruptcy is one option but it is usually considered the “option of last resort” after all other available options are considered. For many of us, a bankruptcy is something that may not be necessary. Let us look at some other options worth exploring:

Cutting Costs

This is often a lot easier than we envision it might be. A quick review of a household budget can help you decide which expenses you can consider chopping or reducing. While it may not be possible to reduce some of your fixed expenses (such as your rent or mortgage payments each month) you can have some control over your variable expenses (such as groceries, clothing, transportation, entertainment, etc.). Once you have found ways to cut down your spending, put the money you end up saving towards your debt repayment or (after your debt has been cleared up) that all-important emergency savings account.

Speaking with Creditors

Our first instinct is to avoid our creditors. However, speaking with them could provide you with an excellent opportunity to negotiate any debt owing to them. If you genuinely explain to your creditors that you are having difficulty affording your expenses and paying down your debt, some, or all of them, may be willing to work with you. Creditors could give you more time to pay back your debt and/or they may consider reducing the amount of interest you pay. They may even offer to settle your debt for a lesser amount than owed. It is amazing how one quick phone call might save you thousands of dollars.

In most cases, creditors get an exceedingly small payment, if any, when a person files for bankruptcy. So, creditors might be willing to negotiate instead of receiving virtually nothing from the Trustee if you file for bankruptcy protection.

Credit Counselling and Debt Settlement

Many credit counselling services in Canada offer debt management programs otherwise known as debt settlement plans. Through these plans, the debt settlement company negotiates with your creditors to convince them to either reduce the interest owed or accept less of the total amount of debt owed.

Take note that many debt settlement companies are for-profit organizations (despite the “not-for-profit” signs on their doors and websites), and some might make unrealistic promises to you when selling you on their services.  It is important to do some thorough research and ensure you are working with a reputable agency before you sign the contract. Creditors know they are not legally required to work with a debt settlement firm or a credit counsellor (unlike a Licensed Insolvency Trustee, as our firm is).

Some creditors working with the credit counsellor may agree to reduce the debt owed to them, but some could outright refuse to negotiate and can then pursue you on their own. You may also be required to pay an upfront fee to work with these credit counselling organizations. The fee is charged up front, before any work has been done, so even if the creditors do not agree to negotiate you have still had to pay something. It is also important to be aware that government debt, such as CRA (the Canada Revenue Agency) tax debt or even student loan debt, cannot be dealt with through a credit counselling service. Only a Licensed Insolvency Trustee such as Farber can assist you with those types of debts.

Debt Consolidation

Debt consolidation is a process that involves obtaining a loan from one lender to pay off various other creditors. The goal of this process is to get a debt consolidation loan with a lower overall interest rate than your current debts. If you are successful in qualifying for such a loan, you will save money on interest payments over time and resolve your debt faster.

However, it can be difficult to get a low interest rate on a debt consolidation loan (especially if you have poor credit due to missed payments). Also, while you may save money on interest, you will still be responsible for paying back 100% of the debt that you owe.

Consumer Proposal

You have the legal right in Canada to make a formal proposal to your creditors. This is called a Consumer Proposal. It is a legal process designed to allow you to formally settle your debts, often for a portion of the outstanding debt amount and without further interest. For example, one recent proposal offered $12,000 to the creditors on a total debt load of $40,000 and was accepted by the creditors.

A Consumer Proposal will protect you from collection agencies and legal actions by your creditors through the courts. A Consumer Proposal can last up to five years and involve a manageable monthly amount or other terms of repayment (such as a lump sum settlement). Creditors are given 45 days (about 1 and a half months) from the date of filing to vote on whether to accept the Consumer Proposal “as is” or request a larger sum.

Licensed Insolvency Trustees (formerly known as Bankruptcy Trustees) are the only professionals licensed to administer Consumer Proposal or Bankruptcy processes in Canada. However, this is not the only way they can advise you on how to handle your debt pressures. They must provide you with details of all the options available to you.

Most trustees offer a free consultation, and if a proposal is filed then all the Trustee’s fees are taken from the proposal payments you make each month. In other words – you do not pay the Trustee separately.

Speaking with a trustee can be an effective way to get back on a road to financial health. If you feel you need some assistance with your debts, and would like to avoid bankruptcy, if possible, please click on the FREE CONSULTATION button, below, or give us a call today. We are here to listen – and to help!