Bankruptcy Alternatives in Canada

There are a number of bankruptcy alternatives in Canada, each with its own pros and cons. These alternatives include:

• Personal budgeting to support debt payments
• Using a debt consolidation loan to restructure debts
• Setting up a debt management plan
• Negotiate an informal debt settlement with your creditors
• Filing a consumer proposal

In this guide, we’ll take a more detailed look at each of these five options – explaining what they involve, the advantages and disadvantages of each, and the next steps you can take to help you decide which is the best bankruptcy alternative for you.

Budgeting and Money Management to Support Debt Repayments

In some cases, careful personal budgeting can work as an alternative to formal bankruptcy.

By creating a budget to track your financial incomings and outgoings, you may find that you can allocate more money towards paying off debts.

To do this, you can start by listing all your income and categorising your outgoings to see where your money goes.

Many people find this helps them understand how they can cut back on non-essentials, allowing them to allocate more money to essential expenses and debt repayments.

Personal budgeting can be especially effective if you set some financial goals – such as saving regularly, not taking on new debt, and creating target budgets on a monthly or weekly basis.

It’s also often useful to revisit and adjust your budget periodically, so you it stays aligned with your goals – helping you stay on track and motivated.

Pros

• Keeping your Assets: Unlike bankruptcy, budgeting allows you to keep your assets and maintain control over your finances.
• Credit Impact: Effective budgeting can improve your credit score over time, whereas bankruptcy significantly damages it.
• Financial Skills: Developing budgeting skills fosters long-term financial discipline and independence.

Cons

• Time-Consuming: Budgeting and managing money effectively require consistent effort and time, which can sometimes feel challenging.
• Limited Relief: For those with significant debt, budgeting alone may not provide sufficient relief from debt collection measures, unlike the immediate impact of bankruptcy.
• Discipline Required: Maintaining a strict budget demands continuous self-discipline and may be difficult to sustain over the long term.

Using a Debt Consolidation Loan to Restructure Your Finances

Although applying for more credit might feel counterintuitive, some people find that a debt consolidation loan helps them rearrange their outgoings – providing a useful alternative to the bankruptcy process.

A debt consolidation loan is a new loan used to pay off existing debts, combining them into one new monthly payment.

People often find this single payment much easier to manage than numerous smaller debts.

Debt consolidation loans often come at lower interest rates compared to credit cards or other high-interest debts – potentially saving money in the longer term.

What’s more, a debt consolidation loan may help you improve the health of your credit report by ensuring consistent timely repayments.

Pros

• Simplified Payments: Consolidates multiple debts into a single monthly payment, making it easier to manage.
• Lower Interest Rates: Often offers lower interest rates compared to credit cards, reducing overall interest costs.
• Credit Score Improvement: Timely payments on the consolidation loan can improve your credit score over time.

Cons

• Simplified Payments: Consolidates multiple debts into a single monthly payment, making it easier to manage.
• Lower Interest Rates: Often offers lower interest rates compared to credit cards, reducing overall interest costs.
• Credit Score Improvement: Timely payments on the consolidation loan can improve your credit score over time.

A Debt Management Plan

A Debt Management Plan (DMP) is another popular debt relief alternative to personal bankruptcy. A DMP is a structured repayment plan designed specifically to help you pay off unsecured debts, such as credit card debt, loans, and medical bills.

A credit counselling agency will organise and administer a DMP on your behalf – negotiating with creditors to lower interest rates, waive fees, and establish a monthly repayment plan.

You will pay a new, manageable monthly amount to the agency, which will then make payments to your creditors on your behalf.

A DMP simplifies debt repayment – making it easier to stay organised and committed to reducing your debt.

Pros

• Retention of Assets: Unlike bankruptcy, you can keep your assets and avoid liquidation.
• Credit Impact: A DMP has a less severe impact on your credit score compared to bankruptcy, which stays on your record for up to ten years.
• Debt Reduction Negotiation: Often includes negotiations for lower interest rates and waived fees, making repayment more manageable.

Cons

• Duration: DMPs can take several years to complete, whereas bankruptcy can discharge debts more quickly.
• Commitment: Requires a long-term commitment to regular payments, which can be challenging.
• Limited Scope: Only addresses unsecured debts, leaving secured debts like mortgages and car loans unaffected, whereas bankruptcy can address both.

Informal Debt Settlements

An informal debt settlement involves negotiation directly with each of your creditors to reach a solution that works for you and them around repaying debts – making it a popular, less formal bankruptcy alternative.

Negotiations with your creditors will sometimes result in reduced balances, lower interest rates, or extended repayment terms.

Unlike bankruptcy and other formal debt relief options, this kind of informal settlement is often more flexible – and almost always less public.

Some people choose to communicate directly with their creditors – although credit counselling agencies or debt settlement companies will also sometimes offer this as a service.

Successful settlements can significantly reduce the total amount you owe, making it easier to manage your finances and work toward becoming debt-free.

Pros

• Less Impact on Credit: Informal debt settlements usually have a less severe impact on your credit score compared to bankruptcy, which remains on your credit report for up to ten years.
• Flexibility: These settlements offer more flexibility in terms of negotiation and repayment terms tailored to your financial situation.
• Privacy: Unlike bankruptcy, which is a public record, informal debt settlements are private agreements between you and your creditors.

Cons

• No Legal Protection: Unlike bankruptcy, informal debt settlements do not offer legal protection from creditors, who can still take legal action if the original agreement isn’t reached.
• Varied Success Rates: The success of negotiations depends on the willingness of creditors to agree, which can be inconsistent.
• Potential Tax Implications: Any forgiven debt in an informal settlement may be considered taxable income, unlike bankruptcy, where discharged debts are not taxed.

A Consumer Proposal

A Consumer Proposal is a legally binding agreement between you and your creditors, arranged through a Licensed Insolvency Trustee – often considered the most popular bankruptcy alternative.

A Consumer Proposal allows you to repay a manageable portion of your unsecured debt back to your creditors over a period of up to five years.

Typically, a Consumer Proposal will reduce your balances and incur no further interest on what you owe.

Unlike bankruptcy, a consumer proposal allows you to keep your assets while providing creditors with a fair repayment plan based on your financial situation.

Your unique Consumer Proposal must be approved by the majority of your creditors – but, once accepted, it stops collection actions and legal proceedings against you, giving you a structured and manageable way to address your debts.

Pros

• Asset Retention: Unlike bankruptcy, you can keep your assets, including your home and car, as long as you continue making payments.
• Credit Impact: While it affects your credit score, the impact is less severe than bankruptcy and usually remains on your record for a shorter duration.
• Fixed Payments: The monthly payments are fixed and based on your financial circumstances, making budgeting easier and reducing stress.

Cons

• Lengthy Process: Consumer proposals can take up to five years to complete, whereas bankruptcy might discharge debts more quickly.
• Creditor Approval Required: The proposal must be accepted by the majority of your creditors, which can sometimes be challenging.
• Cost: Although less costly than bankruptcy, there are still fees associated with filing and maintaining a consumer proposal.

Bankruptcy Alternatives in Canada: A Summary

Although bankruptcy may feel like the only option if you’re struggling with debts, this is not the case.

There are a number of bankruptcy alternatives available to people who live in Canada, including personal budgeting options, the use of debt consolidation loans, a debt management plan, informal agreements with creditors, and consumer proposals.

Each of these alternatives has different pros and cons when compared to bankruptcy – and careful consideration should be given to the one that could best work for you.

Since some of these alternatives require professional help – either from a Licensed Insolvency Trustee or a credit counselling service – it’s a good idea to reach out to one of these services for more support in deciding which of the alternatives to bankruptcy is the best fit for your circumstances.

Key Takeaways

• Explore All Your Options: Before considering bankruptcy, you may want to consider alternatives such as budgeting, debt consolidation loans, debt management plans, informal debt settlements, and consumer proposals.
• You May Be Able to Retain Assets: Alternatives like budgeting, debt consolidation loans, and consumer proposals allow you to retain your assets and have a less severe impact on your credit score compared to bankruptcy.
• Get Professional Assistance: Seeking help from credit counselling agencies or Licensed Insolvency Trustees can provide guidance and support in negotiating with creditors and setting up manageable repayment plans.
• Impact on Your Credit Score: While alternatives may affect your credit score, the impact is generally less severe and shorter in duration than bankruptcy, which remains on your credit report for up to ten years.
• Alternatives Can Involve Long-term Commitment: Many alternatives require long-term commitment and discipline, such as maintaining a budget or adhering to a debt management plan, but can lead to improved financial stability and independence.