Filing for bankruptcy is a voluntary act so no one can make you file for bankruptcy. But we know for most it is the last option they want to consider when looking for solutions to dealing with their debts.
What Does Your Monthly Cash Flow Say?
So what are the other options? In general there are 3 other options for dealing with your debts. The one you pick really comes down to your cash flow — that is, which one makes the most sense for your monthly budget.
Can You Afford Debt Consolidation?
For instance, you may have assets such as, equity in your home and you may be able to use the equity in your home to refinance and reduce your credit card debts. This type of financial option is really a Consolidation Loan and for most, you go to your bank and borrow enough money to repay your debts. If you haven’t spoken to your bank you should at least give this option some thought. Interest rates are quite low right now, so they are attractive but most banks will only consolidate their debts. Lenders who are more broadly willing to loan you may to consolidate multiple debts are likely to charge a higher interest. Make sure you know exactly what interest rate, and fees, you will be paying and for how long.
A successful debt consolidation approach will:
- Improve your monthly cash flow so you can pay your bills in full and on time;
- Cost less than your current option;
- Deal with all your debt problems
- Get you out of debt in a reasonable time period.
Will A Debt Management Plan Work?
Another option, if your debts in total are a small in amount and number, is a debt management plan through a credit counsellor. This is a voluntary program whereby any debts included in the program are pooled together with little or no new interest charges.
A DMP is not a legally binding contract between you and your creditors. This is a great solution for people that can repay their debts, but can’t afford the interest on their credit cards. Usually the plans run for 4 years (take your debt and divide by 48 months to get an estimate of your payment). If you cash flow allows you to repay your debts, in full, over a four year period, then you should consider a debt management program.
What If Neither Option Is Affordable?
By the time most people come to see me in my Toronto offices, they have tried or looked into the consolidated loan with their bank and a debt management plan. Neither option reduces their debt load enough so the payments fit into their monthly budget and change their situation so they can afford to pay living expenses.
There is still one option left to avoid filing bankruptcy if that is what you really want. This option is called a consumer proposal. In a legal proposal to creditors you repay a portion of your debt over a maximum period of 5 years or 60 months. It is called a proposal because you make your creditors an offer that they may accept, amend or reject.
Once you sign the paperwork for the consumer proposal, your creditors have 45 days to consider your offer. If 50% of the amount that you owe accept the deal then all of your creditors are forced to accept it. It becomes a legally binding contract between you and all your creditors. This is very important difference to a debt management plan with a credit counselor which only deals with creditors who volunteer to participate in the program. Also because a consumer proposal is a legally binding contract, a garnishment can be stopped, again something that cannot be dealt with through a debt management program unless the creditor agrees to voluntarily stop the wage garnishment order.
One of the primary tasks to be completed when a trustee first meets with you is to review your debts with you and your monthly cash flow. From there a trustee helps you review all these options so you can choose the one that makes sense for you. Seeing a bankruptcy trustee does not mean you have to file bankruptcy. You may leave with an alternate plan in place.
To review your options, contact one of our bankruptcy trustees for a free consultation. We will review your situation and walk you through all your alternatives so you make the right choice.