Monday, July 25, 2016
Bankruptcy- Things to Know
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.