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How to Get Out of Debt without Filing for Bankruptcy

Getting Out of Debt Without Bankruptcy

Debt can be difficult and stressful. When you’re dealing with a large amount of debt, it can sometimes feel like you have no options. However, there are always things you can do to improve your situation. One option is filing for bankruptcy. Bankruptcy is a legal process that is designed to give people who are unable to pay their debts a chance to eliminate them and start their financial life fresh.

However, bankruptcy is often considered the last resort and one that is typically only used after all other options have been considered. If you are hoping to get out of debt while avoiding bankruptcy, here are some options to think about.

Cutting Costs

If you’re dealing with a large amount of debt and struggling to pay it off, you will likely need to look at your budget and cut some costs. While you may not be able to reduce fixed expenses (such as your rent or mortgage) you will have some control over your variable expenses (such as food, clothing, transportation, entertainment, etc.). Look for ways to reduce your spending and then put the money you’ve saved towards debt repayment.

Speaking with Creditors

While it’s natural to want to avoid your creditors when you owe money, this often isn’t the best strategy to take. Not only will creditors likely charge interest or penalties if you miss payments, but speaking with them may also provide you with an opportunity to negotiate. If you explain to your creditors that you are having difficulty affording your expenses and paying down your debt, they may be willing to work with you. Depending on the situation, creditors might give you more time to pay back your debt (which will reduce the size of each payment) or they may consider reducing the amount of interest you pay (which can make it easier to pay off your debt).

While creditors are under no obligation to help you, if you are honest and straightforward, they might be willing to modify the terms of your debt so you can avoid bankruptcy. In most cases, creditors get very little (if anything) when a person files for bankruptcy, so creditors might be willing to negotiate to avoid it.

Credit Counselling and Debt Settlement

Many credit counselling services in Canada offer debt management programs or debt settlement plans. Through these plans, the debt settlement company negotiates with your creditors to get them to reduce interest or accept less than is owed to them.

Note that most debt settlement companies are for-profit organizations and some may make unrealistic promises, so it’s important to do research and ensure that you’re working with a reputable agency. In addition, creditors are not legally required to work with debt settlement companies and credit counsellors. You may be required to pay an upfront fee to work with one of these organizations, and  the fee is often still charged even if the creditors do not agree to negotiate.

Debt Consolidation

Debt consolidation is a process that involves using a loan from one lender to pay off various other debts. 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, you will save money on interest payments.

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 debt 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

Licensed Insolvency Trustees (formerly known as bankruptcy trustees) are the only professionals licensed to administer bankruptcy processes in Canada. However, this isn’t the only way they can assist with debt troubles. When you meet with a trustee, they will review your financial situation and provide you with details on all the options available to you. One option, which is often considered as an alternative to bankruptcy, is a consumer proposal.

In a consumer proposal, the trustee determines what a fair offer to your unsecured creditors will be. The offer is typically for a portion of the outstanding debt. Once the proposal is prepared, the trustee then sends it to all your unsecured creditors who vote on whether to accept it. If the creditors that are owed the majority of the debt choose to accept the proposal, then all are bound by its terms. This means you will be responsible for only paying off a portion of the debt you owe. Once the proposal is accepted, you will need to make monthly payments to the trustee who will distribute them to your creditors.

Licensed Insolvency Trustees are federally regulated professionals who must adhere to a strict code of ethics. Most trustees offer a free consultation and all fees are taken from the proposal payments and are regulated by law. Speaking with a trustee can be a good way to get an idea of the debt relief options that are available to you.