When Should You Declare Bankruptcy?

Declaring Bankruptcy Is Your Last OptionI’m not a fan of country music, but I’ve always appreciated the following lyrics from Kenny Rogers’ song, “The Gambler”: “You got to know when to hold ’em, know when to fold’em, know when to walk away, and know when to run.”

While he was singing about high stakes card games, those words can also apply to the high stakes gambles we take with our finances. Unfortunately, despite our best of intentions, we sometimes need to just leave the table and start over again. I’m talking about declaring bankruptcy. But before we get there – and the implications of doing so – here a some alternative roots you can take when facing financial ruin.

Alternatives To Bankruptcy

If the threat of bankruptcy isn’t immediately looming over your head, you may be able to take some steps to avoid going down that path. Consolidating your various debts under one lower-interest loan might help you get a better handle on the situation. You can also contact your creditors directly to see if they’d be willing to negotiate a reduced interest rate or more favourable terms. The same goes for student loans. The federal Repayment Assistance Plan can help by capping your payments at a maximum of 20 per cent of your earnings. Finally, if you have any assets (like a home or car), you may be able to sell those to cover your outstanding debts.

A Proposal To Consider

Still not enough money available to meet your debt? If your debts are less than $250,000 (not including the mortgage on your home), you can opt for the increasingly popular Consumer Proposal. This is a formalized version of debt consolidation, mediated by a bankruptcy trustee.

Residents of Alberta, Saskatchewan, Nova Scotia, and Quebec can opt for a Consolidation Order (also known as an Orderly Payment of Debt and, in Quebec, the Voluntary Deposit Service, aka the “Lacombe Law”). Each of these is a version of debt consolidation, handled through the provincial courts.
If none of the above answers your debt question, perhaps it is time to declare bankruptcy.

The Upside to Declaring Bankruptcy

“Debt is kind of like a toothache. It’s not something that you can ignore. Bankruptcy is a solution when no other option will work,” says Doug Hoyes, a bankruptcy trustee with Hoyes, Michalos & Associates in Ontario. Declaring bankruptcy is part of a plan to get you out of debt, and you may even get to keep assets like your home or car.

The advantage is that you’ll get unsecured creditors off your back – no more collections agencies, no garnished wages, and creditors will be prevented from suing you. It won’t necessarily clear up all your debts (keep reading to see which ones are exempt from bankruptcy protection), but it can help you get a fresh start to try and rebuild your financial life.

The Consequences of Declaring Bankruptcy

Contrary to what you may think, bankruptcy does not release you from all debts. First up, secured creditors will still be able to collect as much of their money as they can – typically by taking over or selling the asset you put up as collateral. You’ll also be required to continue making any alimony and/or child support payments you’re responsible for, and if it’s been seven years or less since you graduated, you’ll still be liable for your student loans.

You’ll also have to the worst possible credit rating (an “R9”), and that stays on your credit report for six years after all the paperwork is completed. That said, if you’ve been harassed and hounded by collections agencies for months or years you probably had a pretty lousy one to begin with.

You should also be aware that anyone you co-signed a loan with will still be liable for the debt, even if you yourself are bankrupt. Can you imagine how that will go over at the next family get-together?

How to Declare Bankruptcy

So you’ve tried the alternatives, weighed the pros and cons, and still think bankruptcy is the best solution to your situation. How do you do it? Here are the key steps:

  • First, you need to find and meet with a bankruptcy trustee.
  • The trustee will walk you through the forms required for a formal bankruptcy application.
  • The trustee will sell any of your remaining assets and hold the proceeds to pay off your creditors.
  • You’ll also be required to attend at least two counseling sessions to help figure out what went wrong, and help you avoid the same mistakes in the future.

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One thought on “When Should You Declare Bankruptcy?

  1. Please do not consolidate. It is not free, they will lower your ptayenms by increasing the length of time until you are debt free, and you will take a hit on your credit score. Or they negotiate your debt down after telling you not to pay for awhile adding another hit to your credit score. There is a better way.A. Have a garage sale and sell anything that you no longer need or want.B.Get a temporary part time job, if you have one, get another.Here is a plan that can help you. If you work the plan, the plan will work for you:1. Make a budget. Make the budget a week before you get paid. A budget is not a punishment! It is a tool which will free you from ever having to worry about money again. Put everything in your budget. Especially those annual, biannual, or quarterly bills like car registration, insurance, etc. Give every dollar you are going to bring home the name of where it is going. Add an emergency fund category to your budget for 25 dollars and save up until you have 1000-1250 dollars. Your emergency fund will help keep you from getting into new debt because of an emergency. If you can, set up a direct transfer to a savings account for your emergency fund. That way it moves automatically and you don’t even have to worry about it. You must cut your spending and live on less than you make.2.First get current on all of you debts and make no more late ptayenms. Stop using your credit cards immediately. Do not take on any more debt. Credit cards are like quicksand only the death is much slower. Make a list of all of your debts in order of highest interest rate to lowest interest. Use cash only for your spending from now on.3.Pay the minimum due on all of your debts and then put your extra money towards paying off the highest interest one first. After you get that one paid off, you put the money you were paying on debt #1 (the minimum payment and the extra payment) towards debt #2. That will pay debt #2 off faster. When that is paid off, you put all three ptayenms towards card #3 and that one will be paid off pretty quickly. As an example:To start :Debt #1 (highest interest): minimum payment+ extra paymentDebt #2 (middle interest): minimum paymentDebt #3(lowest interest): minimum paymentDebt #1: paid offDebt #2: minimum payment from Debt #1+ Minimum payment from Debt #2 +extra paymentDebt #3: minimum paymentDebt #1: paid offDebt #2: paid offDebt #3:Minimum payment from card #1+ minimum payment from Debt #2+ minimum payment from Debt #3+ extra payment.That way, you will get them all paid off, on time, and pay the least interest. It will also help towards rebuilding your credit since you will no longer have any late ptayenms. This works no matter how many different debts you may have.4. After you get all of your debts paid off, add to your emergency fund until you have 6-12 months of income saved up. Put that emergency fund money into a liquid money market fund or into a Bank of America no-risk CD so that if you need the money you can take it out without penalty.5a. When you have your emergency fund in place, add a category for fun to your budget. Save for a holiday, a vacation, a big screen, or dinners out, whatever goal you want. Remember to enjoy your life.5b. When you have your emergency fund in place, start saving for your retirement. Join the 401(k) plan at work and contribute the maximum. Your employer probably matches at least part of your contribution so why give up free money? Open a Roth IRA and contribute the maximum on a monthly basis. If you start saving for your retirement now, you will probably retire a millionaire.5c. When you have your emergency fund in place, start saving for your next car. Only buy cars, or other things that depreciate, with cash. Save up for a nicer car. That way you get the interest instead of paying the interest.You can do it and it isn’t as hard as you think. Just follow the plan.

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