The Top 6 Bankruptcy Alternatives For Canadians

Is crushing debt making you feel overwhelmed and hopeless? There are bankruptcy alternatives that offer a more positive path forward without the long-term impact on your credit score. Bankruptcy should be considered as a last resort. Exploring all available options is important to find the right solution for your unique situation.

1. Consolidation Loan

Alternative lenders, including private online lenders and peer-to-peer platforms such as GoPeer, provide another debt-consolidation avenue. These platforms often have more flexible lending criteria. This makes them a viable option for those who might not qualify for traditional bank loans.

However, their interest rates are typically higher compared to banks or credit unions. Yet, they often offer quicker approval processes and can be a lifeline for individuals seeking immediate financial relief.

2. Transferring Debt to a Low-Interest Rate Credit Card?

Opting to transfer your credit card balance to a low-interest or zero-interest credit card makes for another popular consolidation strategy. You may know this tactic as a balance transfer. This approach involves moving your high-interest debts onto a card that offers a promotional period with low or zero interest.

Above all, aim to pay off as much of the principal as possible during this period to maximize savings on interest payments. However, read the fine print for fees or a standard interest rate that kicks in once the promotional period ends.

3. Credit Counselling

Another bankruptcy alternative is to work with a credit counselling agency such as Consolidated Credit Counseling Services of Canada. This involves meeting with a trained professional to create a personalized debt repayment plan. For some people, that plan is as simple as restructuring your budget. For others, your counsellor may need to negotiate with your creditors to lower interest rates or waive fees.

Credit counsellors also provide you with educational resources, financial advice, and counselling sessions to address your debt and improve your financial management skills. They provide ongoing support and guidance to help you reach your goals. Credit counsellors also set you up for success by helping you understand your credit report and how to improve your score.

One more plus: the best credit counselling services in Canada typically offer a free, no-obligation consultation. Simply, talking with a professional leaves no trace on your credit history. However, if you decide to move forward with a debt management plan that involves negotiating with your creditors, that could have an impact on your credit score.

4. Debt Management Plan

Credit counselling agencies, such as Consolidated Credit Counseling Services of Canada, commonly offer this option. This program allows you to repay your debts in full, typically over three to five years.?

A debt management plan generally involves a credit counsellor negotiating with creditors on your behalf to adjust the terms of your loans and credit products. Then your eligible debt is consolidated into a single monthly payment. In most cases, the payment is made to the credit counselling agency, then your counsellor disperses portions of it to your creditors.

The nice thing about this bankruptcy alternative is that it provides a structured repayment schedule without having to apply for a consolidation loan. With a clear plan in place, you’ll know exactly when you’ll be debt-free. This can help you stay motivated and focused on your goal.

Even better, you’ll pay reduced interest rates. By securing lower interest rates, credit counselling agencies can save you money in the long run by reducing the total amount of interest you’ll pay.

On the downside, a debt management program could impact your credit file. Although it generates a note in your credit report, credit bureaus don’t factor it into a credit score.?However, most creditors won’t lend to people who are on a debt management plan. And in most cases, a condition of the plan is that you do not apply for any new credit until you complete the program.

Also, this debt repayment plan can improve your credit score when you make your payments on time. This can account for 35 percent of your score, setting you up for a better ranking in future. Since you’re not applying for new credit and creating opportunities for hard checks, that part of your record stays clear.

5. Informal Debt Settlement

An informal debt settlement allows you to negotiate directly with your creditors to reduce the total amount you owe. While you could save up to 50% of what you owe, proceed with caution.?

Informal settlements often require a lump-sum payment or a very short-term repayment plan. Moreover, if you settle for less than the full amount, it could negatively impact your credit score. This type of bankruptcy alternative will result in a mark on your credit file that indicates you settled for less than the total amount owed. This notation can remain on your credit report for up to 6 years and potentially reduce your score.

Engaging in informal debt settlement means communicating and negotiating credit card debt settlement yourself. For most people, this task might feel daunting given some creditors’ hesitance to accept reduced payments. However, with the right approach and expert assistance, you can reach a mutually beneficial agreement.

6. Consumer Proposal

A consumer proposal is a legally binding process administered by a Licensed Insolvency Trustee. This bankruptcy alternative involves submitting an offer to your creditors to pay back a percentage of what you owe over a defined period of time, up to 5 years.

This option allows you to avoid declaring bankruptcy while granting you legal protection from your creditors. A licensed insolvency trustee will work with you to determine an affordable monthly payment plan based on your income and assets. This proposal then goes to your creditors for their consideration. If the majority of your creditors accept the proposal, it becomes legally binding for all of them.

It also offers you legal protection. Once you file a consumer proposal, your creditors cannot take legal action against you or pursue any further collection efforts. This is called a “stay of proceedings” and can provide you with peace of mind and the opportunity to focus on rebuilding your financial future.

This article is the shortened version of an article originally published on Hardbacon.ca by Heidi Unrau under the title "The Top 5 Bankruptcy Alternatives For Canadians Struggling Financially".