The excessive use of credit led to stories of horror of families suffocated by debts or on the verge of bankruptcy. Whatever the reasons that lead to these precarious situations, know that you do not have to let the ship sink! There are several financial solutions available to help you repay your debts quickly and especially to contain the haemorrhage caused by excessive interest rates.
Although no one dares to talk about it, everyone knows that bankruptcy is one of those options, although it is certainly the least envious.
The consequences are heavy and can stretch over several years. We therefore propose a comparison of the different alternatives to bankruptcy, namely the consumer proposal as well as the consolidation of debts.
You will be able to recognize yourself in these different scenarios, to identify your needs and will be able to seek the help of a professional to put your action plan in motion!
What is insolvency and its consequences?
Insolvency is a very simple concept that needs to be defined before going further. It is the financial statement of a person who is no longer able to pay his debts to his creditors because the value of his liabilities (debts) exceeds that of his assets.
This means that the insolvent person is no longer able to pay his bills, such as credit cards, electricity bills, mortgage payments, and pay all the charges that he has made to his creditors.
The causes of insolvency are many and may include:
-The overuse of credit
-Inadequate financial management
-The job loss
The most obvious consequence of insolvency is the inability to pay back creditors, but it is also one of the essential conditions for declaring bankruptcy or issuing a consumer proposal.
If that’s your case, read on and learn more about these two over-indebtedness remedies.
Debt consolidation, is it an option for you?
Are you in a state of panic before the countless creditors who knock on your door demanding to be reimbursed their due by imposing their excessive interest rate at the first opportunity? If you recognize yourself in such a scenario, debt consolidation might be a beneficial option for you.
Debt consolidation involves borrowing money from a financial institution to repay all debts owed to creditors. This makes it possible to have only one creditor to repay, which greatly facilitates the management of a portfolio already in distress.
Consolidation has many advantages, such as:
– A lower interest rate : Having only the bank to pay back makes the interest rate more favorable than the one you were subject to with several creditors.
– Easy payment: By consolidating debts into one payment, the portfolio becomes easy to manage.
-The credit rating: The consolidation protects your credit side, because the payment plan put in place by the bank will be established so that you are able to pay the monthly payment. This will prevent you from paying your credit cards late, which will negatively affect your rating.
Are you eligible for the consolidation loan?
As in many other situations, the bank has the last word on the granting of the consolidation loan. In this regard, many criteria are taken into consideration by financial institutions to decide whether you are eligible for the loan.
Here are a few :
-Payment history: Were you able to make your payments on time in the past? Have you accumulated months late on certain credit cards? These are some of the factors that banks take into account when looking at your payment history.
-The credit report: We agree that if you are considering debt consolidation, your credit rating may not be as good as you would like. Each bank has its own standards, but the quality of your general credit file will dictate your eligibility for the loan, and in the event of your admission, the interest rate that will be attached to it.
-The salary: Whether the loan you want is guaranteed or not, the bank will inevitably look at your annual income to establish your ability to repay. The salary is all the more important if you hope to contract an unsecured loan, because the bank will have no property assigned to your obligation to ensure the payment of their debt.
-The amount of the debt: The amount of the debt may make you ineligible for the loan, but the size of this amount is also associated with your ability to repay, which it results from the amount of goods you have to provide as collateral and the annual income you receive. This means that the more assets you have, the more likely you are to receive the loan needed to consolidate your debts.
Keep in mind, however, that these criteria are not exhaustive and that anyone requesting debt consolidation has defaulted on one of the above obligations at some point in their life. This is a way for the bank to measure your ability to repay the loan.
As a result, your credit rating must maintain a certain standard in order to qualify for the loan! That’s why it’s better to meet a financial planner who can analyze your file and tell you if your rating is high enough to receive a consolidation loan.
Secured and unsecured loans, will you have to provide a security?
In many cases, yes! Depending on the precariousness of your financial situation, the bank may require you to provide one or more assets as collateral to secure the payment of their claim. For example, the equity of a house can be given as collateral during a debt consolidation.
If you do not own a home, you can provide another property as collateral, such as a motor vehicle, a boat, a recreational vehicle or other valuable property that the bank will accept as collateral.
If you have no property to give as collateral, you will receive an unsecured loan. This entails more risk for the bank, so conditions may be less advantageous.
In addition, when you benefit from a secured loan, it is important to make the payments on time and fully because collateral can be seized in the event of non-payment.
The disadvantages of debt consolidation:
Debt consolidation does not just come with benefits. The flip side of debt consolidation is in the loan itself. Among other things, you will most likely need to provide a warranty, as previously mentioned.
Contrary to the proposal to the consumer, you will have to pay the entire debt due to creditors, which represents a financial disadvantage of size depending on the severity of your situation.
In any case, it is important to shop your loan well, because they are not all equally advantageous. In fact, consult a professional who will make sure that you have the necessary funds to pay the entire loan, that the repayment period is reasonable and that the interest rate corresponds to market standards for situations similar to yours.
At the very least, debt consolidation is an effective way to avoid bankruptcy and an alternative to the consumer proposal.
The consumer proposal is another alternative to bankruptcy that has many benefits, such as a reduction in the total debts to be repaid. It consists in issuing a reduced payment proposal to the creditors by offering to pay them only a part of the sum due to them. For example, a debtor at risk of insolvency could offer his credit card company to pay only 60% of the total debt.
It may seem inconceivable that creditors accept such a reduction, but it must be known that the bankruptcy of the debtor may result in creditors being left penniless. Indeed, bankruptcy involves a contest between creditors, and those who have an unsecured debt are likely to never get paid.
What are the conditions to respect to make a consumer proposal?
First of all, you have to have a minimum debt of $ 1,000, without it exceeding $ 250,000. This does not, however, include the value of your home mortgage. In addition, you must not have declared bankruptcy to avail yourself of such a proposal and you must be unable to make your payments.
The proposal must not provide for a repayment plan of more than 5 years and the trustee responsible for the file must ensure that you have the means to repay the debts to your creditors.
Moreover, it is this licensed trustee in insolvency who will be responsible for your consumer proposal according to the requirements of the law in accordance with the legal procedure.
The procedure to follow
-Engage a trustee in bankruptcy. It will take stock of your debts and analyze your financial situation to prepare an optimal proposal that will likely be accepted by your creditors.
-The trustee will prepare a payment plan that will respect the rights of priority creditors by ensuring that they are paid before ordinary creditors.
-The trustee will file the proposal documents with the Office of the Superintendent of Bankruptcy, which will result in a stay of proceedings against you. The actions of your creditors against you will therefore be suspended. These will only resume if the proposal is rejected by the creditors.
-The trustee will produce a report of your financial situation that he will attach to your consumer proposal in order to inform your creditors of the reasons for this proposal and your financial troubles.
-After reading this proposal, your creditors will have 45 days to accept or reject your proposal. This acceptance or refusal is done by vote of the creditors.
-The creditors can request the holding of a meeting at which a vote will be held on the proposal. The value of each creditor’s vote is in proportion to the value of their claim. The creditor to whom you owe 50% of your debts therefore has a greater voting right than the one holding 10% of your debts.
-In order for the proposal to be accepted, creditors must vote with a 51% majority in favor of acceptance.
As for the assembly, you must know that it is not obligatory. It must be requested by creditors within 45 days of acceptance. If no creditor requests the holding of this meeting, the proposal is deemed to be accepted. The result is the same if the meeting is requested, but no creditor presents itself.
-If the proposal is rejected, the bankruptcy process is not automatically initiated, except that the lawsuits suspended during the procedure of consumer proposal resume and you will have to find another alternative if you do not want to declare bankruptcy, such as the debt consolidation. You can also issue a new proposal after editing it.
-If the proposal is accepted by the creditors, you will be legally bound to comply with it in accordance with the payment agreement and presenting you at the scheduled meetings with the creditors.
-The proposal does not protect you from debts to secured creditors, however, because the security they have with respect to your property means that they are not included in the consumer proposal. They can therefore always claim their claim.
-Finally, the payment agreement with creditors can take the form of a monthly payment, or a lump sum payment. It all depends on your financial situation.
The benefits of a consumer proposal
-It helps reduce the total amount of your debts to repay. By accepting your proposal, your creditors waive the portion of the debts not included in the proposal. (Ex: If you owed $ 100,000 to your credit card company and you make a consumer proposal offering to repay 60% of the debt, the credit card company gives up 40% of its debt, or 40,000 $.
-The charges, lawsuits and remedies of your creditors against you are suspended for the duration of the proposal. These remedies can only resume if you default to the payment agreement. For example, if you miss three payments in a row, the proposal may be canceled at the creditors’ request.
– Unlike bankruptcy, the mention of a consumer proposal to your credit file disappears very quickly, after 3 years.
-The proposal prevents your creditors from suing you and taking you to court to assert their rights. It also prevents the seizure of your salary. In addition, the proposal prevents your creditors from contacting you directly to demand payment. In fact, the authorized trustee in insolvency becomes the only interlocutor authorized to contact your creditors. He therefore becomes the messenger of all parties involved in the consumer proposal.
Secured creditors, privileged and ordinary
Although the consumer proposal protects you against certain creditors, the debts you have with secured creditors , those who hold a security attached to one of your property (such as the mortgage on your home), are not affected by the consumer proposal, so you will have to continue making these payments before, during, and after the proposal. The only way to protect yourself from such creditors is to declare bankruptcy.
Privileged creditors , for their part, are those who do not have security attached to your property, but who are still, by operation of law, advantaged over other creditors. The trustee must therefore consider the status of each creditor by writing your proposal.
In the case of ordinary creditors , they are fully subject to the consumer proposal and, like the other two types of creditors, have the right to vote on the acceptance or rejection of the proposal.
You have certainly noticed that the consumer proposal differs greatly from debt consolidation. It allows you to reduce the size of your debts and spread your payments over a longer period.
This is a real relief in many cases and will allow you to breathe better during the entire duration of the proposal. However, the intervention of a trustee is necessary to accomplish such an approach, especially for the drafting of a consumer proposal that will be accepted by your creditors.
What is the difference with a proposal for a concordat?
The proposal is similar to the consumer proposal except for being more complex and more often used by companies for the same reason.
The consequences of refusing or failing to comply with the terms and conditions set out in a proposal for concordance are also much more serious than they are for a consumer proposal. In both cases, the creditors can request the termination of the proposal, which will automatically put the debtor bankrupt.
Personal bankruptcy as last resort?
Bankruptcy has had a bad reputation for a long time. We try to avoid it at all costs for fear of the consequences that attach to it. This fear is not unreasonable, because the bankruptcy has many inconveniences that it is better to avoid. This is why personal bankruptcy is a last resort solution used when debt consolidation is not possible due to insufficient credit record quality or if the consumer proposal is denied.
Bankruptcy is actually a way to get rid of your debts quickly by liquidating some of your property for the benefit of your creditors. Some of your property will be sold to pay your debts. There are two types of bankruptcies, voluntary bankruptcy that you initiate on your own and the forced bankruptcy your creditors force you to do.
The elusive goods
Although part of your property will be seized when you declare bankruptcy, the law provides for several exceptions that will allow you to keep some of your assets.
Here are some examples of properties that are not eligible for eligibility in a personal bankruptcy:
-The furniture of your house
-The tools needed to do your work
– RRSPs that are more than 12 months old before bankruptcy.
One of the main reasons that prevents people in debt from declaring bankruptcy is the fear of losing all their property during the bankruptcy process. However, not all your assets are likely to be seized. Indeed, only these categories of property can be seized by your creditors:
-Your vehicle (unless it is essential to your job)
-Your surplus qualified property (recreational vehicles, works of art, ATV etc.)
-Some amounts invested in retirement savings plans (RRSPs)
If you own a building, it will only be included if the trustee decides that it would be advantageous to sell it to pay your creditors. It depends on your financial situation and the total debt to be repaid.
What debts are part of the bankruptcy?
Not all your claims will be included in the bankruptcy process. Some of them are not eligible under the law, so you will not be released even if you are bankrupt. These debts include:
-Debts related to criminal prosecution
-Student loans (except special circumstances upon court approval)
In addition to these debts, a creditor whose existence you have not declared to the insolvency trustee may also avail himself of his right and demand his payment. It is therefore important to disclose the existence of all your creditors to your trustee in order to benefit from the full effects of the bankruptcy law.
The conditions of bankruptcy
The conditions of bankruptcy are not very demanding. Just have a minimum of $ 1,000 of debt and as in the case of debt consolidation, one must be unable to pay off debts to creditors.
General steps of bankruptcy
-Meet a licensed trustee in insolvency: This one will analyze the financial file of the insolvent person and will evaluate the different possibilities. It will decide whether bankruptcy is the only solution.
– Formal filing of the file: If bankruptcy is the option chosen, the trustee will file the necessary documentation with the Office of the Superintendent of Bankruptcy so that the process begins and the protections provided for by the law will take effect.
-Sending a notice to creditors: Your trustee will take the responsibility to contact your creditors to inform them of the bankruptcy set up and your financial situation.
– Monthly Payment: According to the agreement put in place by the trustee, you will have to make monthly payments to your trustee for the benefit of your creditors, until you are released from bankruptcy.
-Liberation: Bankruptcy ends when the obligations of the bankrupt have been discharged. The duration also depends on the number of bankruptcies that you have declared previously. For a first bankruptcy, the duration will be 9 months if you have no surplus income or 21 months otherwise.
What are the consequences of bankruptcy?
It is obvious that bankruptcy has its own consequences for personal finances. It is therefore important to make sure that this is the last option available to you before starting this process, as it leaves a long-term mark.
– Credit report: The bankruptcy appears on the credit file for 6 years after the bankrupt’s release in the case of a first bankruptcy and for subsequent bankruptcies, they will remain on file for 14 years.
-Access to credit: It is impossible, under the law, to have access to credit while you are bankrupt. You will become eligible again at the time of your release, except that nothing prevents the credit companies from refusing to contract with you. It can therefore be very difficult to access credit after declaring bankruptcy.
-Credit: Declaring bankruptcy inevitably has negative repercussions on your credit rating. Indeed, you will find yourself automatically with an R-9 rating, the lowest possible rating.
– The endorsers : If the bankruptcy releases you from your obligations, it has no effect towards those with whom you had previously contracted. Your endorsers will therefore always be required to repay the debts they had committed to cover in case of default on your part.
Benefits of bankruptcy
Despite these negative aspects, bankruptcy has many advantages that resemble those of the consumer proposal. Among other things, bankruptcy has the effect of:
– Suspend legal action: As in the case of a consumer proposal, bankruptcy has the effect of suspending legal actions brought by your creditors against you. You will not have to fight in court against a creditor who demands his payment; the law protects you on bankruptcy protects you from such procedures.
– Freeze interest charges: At the time of filing bankruptcy documents, interest charges are frozen and your creditors lose the right to collect the money you owe them.
-The debts disappear at the end of the bankruptcy : The main attraction of bankruptcy is obviously to make the debts disappear, and it is the final result which results from it, with the exception of the debts which do not enter the process bankruptcy.
As you have seen, bankruptcy is truly a last resort. Although it has the effect of freeing you from the clutches of your creditors, it has many consequences that will follow you for many years, such as limited access to credit.
It is therefore essential to deal with experts in the field of finance and insolvency. By hiring a trustee in bankruptcy, he will present you all the options available to you taking into account your personal and financial reality. He may even be able to avoid personal bankruptcy if the terms of the debt consolidation or the consumer proposal are met.
The authorized insolvency trustee
When talking about the trustee in bankruptcy, it is important to know his or her role as an insolvent person, because he is often the person you will use to get out of trouble. In fact, the trustee’s mission is to help you improve your financial situation by setting up an action plan that may take the form of debt consolidation, a consumer proposal, a personal bankruptcy or still a recovery plan.
He is also a counselor who will accompany you throughout your insolvency situation by bridging the gap between you and your creditors. This is a huge advantage because you will not be harassed by the incessant calls of insistent creditors.
The trustee, who holds a license issued by the Office of the Superintendent of Bankruptcy, is also responsible for administering the Bankruptcy and Insolvency Act in accordance with the applicable legal provisions based on the remedy option chosen. In this way, he ensures that your rights, as well as those of your creditors, are respected.
For example, in the case of a bankruptcy, the trustee who will handle your file will stay with you until your release by completing all the formalities that accompany this process.
What happens if your spouse declares bankruptcy?
Today’s reality is that many people share debts with their spouses or even with ex-spouses. This may be the case for a car, the furniture of the house, or even a house owned condominium. Be that as it may, it is important to know the consequences of your spouse’s bankruptcy on your own finances, because the effects of bankruptcy differ slightly when you are in a relationship.
Be aware, at first sight, that you will not be held responsible for the debts of your spouse. In fact, everyone is personally liable for the debts they incur, without incurring any responsibility for the other spouse. Where the rub is in the event that you hold common debts with your spouse …
For joint debts, for example, a line of credit used by both members of the couple, you will be responsible for repayment of debts when the bankruptcy is triggered. You will not only be responsible for the debts you have incurred yourself, but also the part that is owed by your partner. This means that if your spouse goes bankrupt, there is a strong risk that creditors will turn to you.
Exceptions exist, of course. As mentioned previously, certain properties are classed as exempt from the Bankruptcy and Insolvency Act, so that they can not be seized by creditors, even in the event of a spouse’s bankruptcy. .
In the case of tangible property held in co-ownership, such as a car, the trustee will only be able to use the portion of the vehicle that belongs to your insolvent spouse to pay the creditors, without affecting your share. It also goes without saying that the furniture that you own fully can not be seized, and that if such a scenario arises, you will always have a remedy against the trustee to prove that you are well or the owner of these goods.
But what happens with the house? If you are co-owner of the house with your spouse, know that his share can be used to repay his creditors, but it is possible to prevent the sale of it by paying the value of the share of your spouse to the trustee in bankruptcy.
As you can see, the bankruptcy of the spouse has a significant impact only if most household debts are joint. In such circumstances, it is possible that the bankruptcy of your partner forces you to undertake an action plan to avoid yourself bankruptcy. If not, everyone is responsible for their money and their debts.
Voluntary deposit, a viable alternative?
Are you still committed to avoiding bankruptcy and finding a realistic alternative to your money problems? We understand perfectly, and that’s why we present voluntary deposit as an alternative to bankruptcy. This approach involves paying a portion of your salary on a voluntary and regular basis to gradually repay your debts.
The total amount of income returned to the Court must be equal to or greater than the value of your seizable property, since it is an alternative to bankruptcy. A calculation is however made to deduct a certain amount from this total sum. The Court then proceeds to share the sums among the creditors in proportion to their due.
Because voluntary depositing prevents bankruptcy, it provides creditor protection for the seizure of many of your property and especially your salary.
To take advantage of the voluntary deposit, simply fill out the Court’s form asking you to return the seizable portion of your salary periodically. Depending on your financial situation, voluntary deposit may be an alternative of choice for bankruptcy.
Business owners: What is the impact of a personal bankruptcy?
In many cases, the personal bankruptcy of a business executive has little impact on the business itself, unless it is a sole proprietorship. From a legal point of view, the manager and his sole proprietorship form only one legal personality. This means that he is personally responsible for the actions of the company, but also for his debts.
In such a scenario, this implies that if the company declares bankruptcy, the trustee will be in his rights to seize the seizable personal property of the business executive in order to pay the creditors.