For most small business owners and self-employed individuals, filing bankruptcy in Canada should be carefully considered.
First, we’re going to outline the advantages and disadvantages of filing for bankruptcy —- you need to weigh the pros and cons of bankruptcy. Then, we will discuss five effective ways to avoid bankruptcy that you can include when making a plan of action.
Advantages of Filing for Bankruptcy
You need to weigh the pros and cons before filing for bankruptcy. This decision will depend on how much debt you are in, your income, and your living standards. Here are the advantages of filing for bankruptcy:
- You are no longer obligated to pay most debts
- You no longer need to make direct payments to creditors
- Your wages will stop being garnished (does not include support payments)
- Unsecured creditors can no longer take legal action against you to collect debts covered by the bankruptcy
- Collection agencies and creditors will stop making harassing calls as the debt has legally been dealt with.
- Once your bankruptcy is discharged, you can start a new financial future
Disadvantages of Filing for Bankruptcy
You should also be aware that declaring bankruptcy places you in financial restraints with these disadvantages:
- Your bankruptcy will appear on your credit report for 6-7 years
- You must surrender all credit cards to the trustee
- Some assets may have to be surrendered to your trustee whose job it is to realize upon the assets for your creditors
- You will be required to keep detailed records of your income and expenses during your bankruptcy
Many people think that filing for bankruptcy rids you of all debts. However, certain types of debt will remain. Debts you still owe after bankruptcy include:
- Car loans (if your choose to keep your car)
- Child Support
- Debts caused by fraudulent activity
- Fines or penalties imposed by the court
- Mortgage (if you choose to keep your property)
- Student loans (if you have attended school in the last 7 years)
Now that you know the advantages and disadvantages of filing bankruptcy, here are five effective ways to avoid bankruptcy that are practical and can help your financial future.
1. Sell your personal assets
Selling some of your assets is a temporary solution to trimming down your debt and keeping your credit rate afloat. By informing your creditors that you are planning to sell your personal assets, they will usually give you a timeframe to pay down your debt. Keep in mind that this may result in the need for life-style changes.
The disadvantage to selling your personal assets is that you most likely need these belongings in life. You need to take a step back and evaluate how important these assets are and if you can survive life without them. It might seem like a quick fix to pay off your debts by selling your assets; however, in the long-run, it could affect your financial future. Remember, if you decide upon bankruptcy you get to keep basic clothes, furniture, and a basic vehicle.
2. Live on a budget
Next to selling some of your assets, personal budgeting can do wonders for paying off your debts. Before filing bankruptcy, you have to ask yourself, “Can I afford to repay my debts on my own?”
If you think ‘yes’ or ‘maybe,’ we advise you to create a personal budget, outlining how much your monthly income is and how much you have available to pay off your debts. Then, list down the amounts of each debt and monthly payments, and calculate how long it will take to pay them all off.
A great way to start budgeting is to write down what you spend each day; do this every day for a month. Now add up the amounts by category (auto expenses, groceries, etc.) so that you know where your money is going. Now you can set your priorities.
3. Filing a consumer proposal
When you file a consumer proposal, you need to outline the amount you owe to your creditors and offer to pay them a percentage of the amount owed based on what you can afford and offering at least what they would get in a bankruptcy. It’s also a chance for you to propose a timeline to deal with the debt at an amount you can afford.
For example, if your debt is $100,000, the consumer proposal may offer to pay 40% of that debt within five years. If the creditor agrees to the payment terms in your consumer report, it’s a legally binding contract, and you must make payments.
A great benefit of a consumer proposal is that the amount agreed to is fixed. There are not any interest charges.
You cannot file a consumer proposal on your own. Filing a consumer proposal requires the services of a Licensed Insolvency Trustee such as Kevin Thatcher & Associates Ltd.
4. Cut spending
There are two ways to fix a budget:
- Increase income
- Decrease spending
Cutting your spending goes hand in hand with personal budgeting. Being diligent in all aspects of your spending will help you save in the long run. If you want to get creative with personal budgeting and saving money, check out how to budget creatively and be debt-free.
But to save money, you must spend less money. Penny-pinching might be a tedious thing to do, but at the end of the month, it does save you dollars and cents.
5. Seek professional debt counselling
If you don’t have a lump sum of money, but feel you can pay off your debts over a period of time, debt counselling may be a good choice. During the debt counselling process, we can help you create a debt management plan where you outline a payment plan that will enable you to pay your debts in full.
Remember, before you file for bankruptcy, you can try to prevent it. You can consider:
- Selling some of your assets
- Living on a budget
- Filing a consumer proposal
- Cutting spending
- Getting professional debt advice
To learn more about how you can avoid going into bankruptcy, call Kevin Thatcher & Associates at 1-866-702-9801 or contact us here.