I am so excited today to publish this guest post written by Janine.
Hi my name is Janine and I am a 20-something pursuing a career in Accounting while training to maintain balance in my life and achieve financial independence. You can check out my blog over at My Pennies, My Thoughts.
Credit can be bittersweet. On one hand credit can be utilized as a tool to prove your ability to pay off borrowed money. On the other hand credit can work against you. Miss a payment or two, and there goes your credit score. What about applying for too much credit within a small time frame? That can lower your credit score as well.
Credit can define you.
What you have to remember is, it’s all about risk. What risk does the bank take when lending you money? If you are a good client, with a strong history, and steady job, then you are less of a risk to the bank. On the other hand if you have made late payments or missed payments your credit score may suffer. Your credit score will define you.
So you find yourself behind on your bills, things start piling up; you can’t make your payments. You think to yourself that you may in fact have to declare bankruptcy, is this your only option?
As Canadians, there are 3 basic options to dig your self out of that very steep hole you have dug.
1) An Orderly Payment of Debts
2) Submit a Consumer Proposal
3) Declare Bankruptcy
All of these options fall under the federal legislation of the Bankruptcy and Insolvency Act.
Orderly Payment of Debts (Section 10 of the Bankruptcy and Insolvency Act)
- Speaking strictly for Alberta one of the only Government Credit Counseling programs to assist you with this is through Money Mentors.
- This option offers you a consolidation of all of your unsecured debts (basically debts that have no collateral).
- This repayment strategy is set out over 4 years with an interest rate of 5%.
- While you are in the process of paying back your debts your credit rating will move from an R9->R7 and the R7 is removed from your credit score after 2 years. (for more information on credit ratings click here).
The only unfortunate thing is that provinces are allowed to opt out of this option.
Check out Money Mentors Orderly Payment of Debts Assessment here.
The Consumer Proposal
A good way to think of a consumer proposal is a 5-year plan (most are usually around 2-3, but 5 is the maximum) for your creditors. To qualify for a consumer proposal you must have less than $250,000 in debt (excluding your mortgage) and be declared insolvent (unable to pay your debts).
By going to a licensed trustee they will be able to help you submit a proposal that will not only make it worth it for the creditors but will make it easier for you to pay off and generally one of three things will happen: 1) a lump sum payment 2) monthly payments or 3) combination payments. This could mean that you don’t end up paying all your debts back. If your proposal is approved and you make the payments required over the 5 years (or less) the rest of the outstanding debts in poor standing will be abolished. This option can really save you from bankruptcy, which can be a really messy situation.
This isn’t a fun option. There is no easy way out. This one you have to face head on. If you need to declare bankruptcy you must hire a licensed trustee who will take possession of your assets (put them in trust). Your secured creditors will be paid first (secured assets are backed by something like equity, or collateral). Your remaining assets are distributed among your creditors. After it’s all said and done, you will be granted a discharge. Sounds simple right?
Bankruptcy can be a messy thing to get yourself into. It shouldn’t be used as an out. Bankruptcy is serious and will affect your credit score and ability to borrow for a long time. Bankruptcy should only be used if you have no other options, or if a licensed professional informs you it is your best option.
On the other hand, don’t fret too much about all your assets being seized. Speaking again for Alberta (each province is different) many of your assets are protected under the Civil Enforcement Act & Regulations.
Some items exempt are:
- Food required for up to 12 months
- Clothing up to $4,000
- Household furnishings and appliances up to $4,000
- Motor vehicle up to $5,000
- Principal residence up to $40,000
- Tools for occupation up to $10,000.
A little side note about the principal residence. If you own a $400,000 home and have $380,000 remaining on your mortgage, you really only own $20,000 worth of home, which falls under the $40,000 threshold, and thus you would get to keep your house.
I’m not trying to scare you, nor am I trying to make you think you can beat the system. Frankly, being in an over-whelming amount of debt puts great stress on individuals and even more stress on families. I am simply trying to identify your options and lay them out on the table for you.
I hope this helps!