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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