Over the last number of years I noticed a growing trend in
the financial sector surrounding the view on bankruptcy. I have witnessed a
softening approach to the consideration of applying for bankruptcy. There was a
time when individuals filed for bankruptcy as the last resort, today however applications
for bankruptcy show clear signs of the lack of advice that people are
receiving. There are particular cases where bankruptcy is warranted however
there are so many alternatives that should be pursued first. The purpose of
this blog is to inform readers to really think hard before declaring bankruptcy
and scaring their credit score for 7 years. Seven years is a long time to interrupt
credit access especially with a family where the potential need for credit is
increased. It is not easy to see uninformed members of our credit union
immediately regret the bankruptcy decision because they were not provided the
facts and the alternatives.
The Office of the Superintendent of Bankruptcy Canada which
regulates bankruptcy legislation even highlights that bankruptcy should be the
last resort. They recommend several options prior to considering filing for
bankruptcy.
1. Contact
your creditors. Creditors will want to work with you on trying to restructure
your credit to make it more affordable. If you are honest, explain your current
situation and show the correct intentions then this will increase your chances
of a creditor working with you. Your credit union is here for you, so it is
very important that we work with you and assist during a rough patch. Far to
often I see the situation where members are embarrassed by their financial situation
and as a result by-pass talking to their credit union contact. It is during
these rough patches that you need the professional advice of a credit union
advisor.
2. Credit
Counselling. If you are uncomfortable to speaking to many creditors and you
want the process to be easier, then this free Government supported service is available.
These individuals are professionally trained and are there for your benefit.
The service is completely free, and they work on your behalf to talk to
creditors to arrange rate reductions, term extensions, lower payments or settle
on a balance for your account. This is an excellent service and they work to
protect your credit and keep a relationship with your creditors which you will
value in the future.
3. Debt
Consolidation. Many credit extension problems commence with credit spread across
many products. The more credit options that a person has the more difficult it
is to manage a credit reduction strategy. A rule of thumb I often advise
members I speak to is the rule of one. One source of revolving credit (credit
card or line of credit), one loan, one mortgage. Consolidate your outstanding
credit in one of those products and remain committed to managing your
outstanding credit. I am witnessing bankruptcy files with as high as 6 credit
cards and multiple other credit product lines. The potential of missing a
payment, not realizing the accumulated debt, or paying high rates become prominent
with such a situation. Applying for a consolidation loan is a great way to
commence a strategy to manage debt.
4. Consumer
Proposals are very similar to credit counseling however the focus is on
settling the debt for a lower amount. The outcome of this action could result
in an individual’s credit score drastically reducing because essentially the
debt was not paid in full. Traditionally this service comes with a cost and is
provided by a bankruptcy agency.
Bankruptcy is of course the last resort where you assign all
your assets acquired during your bankruptcy to the trustee representing the
bankruptcy agency. These assets will be divided among your creditors and
liquidated. In some cases the trustee will negotiate on your behalf with a
secured creditor to allow you to keep a particular asset. For more information
follow this link https://www.ic.gc.ca/eic/site/bsf-osb.nsf/vwapj/Dealing-with-Debt-EN-F01-2015-12-03.pdf/$file/Dealing-with-Debt-EN-F01-2015-12-03.pdf
People also need to understand that the filing of bankruptcy
is a business. There are agencies that guide people through the process,
provide advice, and collect handsomely for it. I am not indicating that all
agencies are financially motivated however people need to understand that this
service comes with a cost. This cost should be considered when balancing the
current debt versus the payment for bankruptcy service. For example, if your
bankruptcy application is going to cost an average of $300 a month for 21 months,
a thought should be how this $300 can be used alternatively to bring down your
debt. I have witnessed cases where people have declared bankruptcy with small
debt loads. If they had sought credit counseling and used the funds they were
paying for bankruptcy to reduce their debt, they could have protected their credit
and paid of their credit obligations.
The bottom line is there are legitimate reasons where
bankruptcy is the only real solution. The sad reality is that people are
getting the wrong advice and bankruptcy is used as a first resort versus taking
other necessary steps. In one case in which I recall, members went bankrupt and
the assets that were seized by our credit union were sold for the near balance
of the debt outstanding. If the members simply sold the assets themselves and
worked with the credit union, the remaining balance could have been
consolidated and bankruptcy avoided. Instead, they had to deal with a poor
credit rating for seven years and experience their assets being displayed for
sale in the public.
