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Will Declaring Bankruptcy Solve My Debt Problems? By Julie Jaggernath Does it feel like your debts are out of control? Maybe you’re wondering if going bankrupt would be the way to solve your debt problems once and for all? Most of us don’t worry about our debts until they’ve become too stressful to ignore. But unfortunately, the longer we ignore our debt, the more dire our situation can get. Thankfully, there are more options than most people realize for getting back on track because the process of bankruptcy has long term consequences. While bankruptcy might be worth considering, explore your other options first. Then, if nothing else works, you can still file for bankruptcy later. Start by Thinking About Why You’re in Debt Before you can determine what you need to do to get your finances back on track, think about why you keep struggling with debt. This will help determine which solution will work best for you. Ask yourself: Do I use a budget to help me decide what I want to spend? Does my budget include setting money aside for emergencies? Am I saving towards my goals or using credit to pay for them when I want them? What will my income likely be for the next 3-5 years? Which non-financial issues have contributed to my situation? If you’ve taken out a consolidation loan in the past, also ask yourself what lifestyle choices you struggled to make as you tried to bring your expenses in line with your income. Answer these questions honestly for yourself, without filtering them with what you think you should be doing. It’s important to evaluate your money management habits accurately. This will help point you towards a realistic solution for your debt problems that benefits you not just now, but in the long term as well.Can You Live With the Long-Term Consequences of Bankruptcy? Going bankrupt might seem like an easy way to get out of debt and fix your credit rating. But did you know that when you file for bankruptcy it is noted on your credit bureau report and stays there for 6 years after you’ve obtained your discharge? A second bankruptcy will remain on your credit report for 14 years. During this time it will be difficult to borrow money, it can affect your job choices, and it could even prevent you from renting the home you want because landlords will often shy away from renting to someone who has had trouble paying their bills. Many people also overlook the huge emotional cost that comes with bankruptcy. No one sets out to get into debt and file bankruptcy, so long after someone’s credit report no longer reflects their past difficulties, feelings of shame can remain. Some people are also filled with overwhelming regret. This is partly due to the fact that once you declare bankruptcy and sign the paperwork, there’s no turning back. If you wake up the next morning and want to change your mind, it’s too late. Your filing becomes a matter of public record, remains part of a permanent, searchable database, and needs to be declared if you’re asked if you’ve ever gone bankrupt. Bankruptcy Is Not a Good Option for Everyone If you ask Canadians, most believe that anyone can go bankrupt. While it’s a practical option for some people, there are costs and fees that go with declaring bankruptcy and it is not the right solution for everyone. Depending on your income level and assets, it can be a very expensive way to solve your financial problems, and it might not even get rid of all of your debts. Secured debts like a mortgage or car loan cannot be included in a bankruptcy. Student loans are generally excluded if it has been less than 7 years from when you stopped studying. This rule is in place to help ensure that the student loan system, which is largely self-funded, is available to everyone who qualifies to use it. There are other debts that survive a bankruptcy filing, and declaring bankruptcy on joint debts will impact the other borrower. You Won’t Automatically Lose Everything to Bankruptcy Bankruptcy, however, doesn’t mean that you automatically lose everything you own. If you still have money in an RRSP, only the most recent 12 months of contributions are used to pay your creditors. Most provinces allow you to keep your personal items and basic household furnishings as long as their value doesn’t exceed certain provincial limits. You are also allowed to keep necessary medical and health related equipment. Some provinces have provisions that allow you to keep a modest priced vehicle as long you don’t have a lot of equity in it. You may also be able to keep the tools you need to earn a living, as long as their value is within the allowable limit. However, the biggest question most homeowners have is if they can file for bankruptcy and keep their house. Generally speaking, if you have assets above what you’re allowed to keep your trustee will arrange to sell those assets so that the money can be used to pay your creditors. However, if your finances allow for it, you might be able to buy out the surplus and not lose your home. Consider Other Options and Alternatives to Bankruptcy Bankruptcy is not meant to solve a short-term cash crunch. It should be used as a last resort. That’s why it’s important to reflect on what got you into debt in the first place. Canadian bankruptcy laws are designed to provide legal protection for people in severe financial hardship and to give them an opportunity for a fresh start. You owe it to yourself to carefully explore all of your options and the implications of each. Alternatives to bankruptcy include debt consolidation loans, debt repayment programs, debt settlements, consumer proposals, or even communicating with your creditors because you’ve got no ability to repay your debts for the foreseeable future and you’ve got no assets to sell to come up with a lump sum payment. This is where one of our credit counsellors can help you to weigh the pros and cons of each option. We provide this service to you for free, and if bankruptcy looks like an option you should explore, we’ll refer you to reputable trustees in your area. 6 Times When Bankruptcy Might Not Be Right for You Get Help to Deal With Your Debts and Learn More About Bankruptcy When it comes to dealing with your debts, learning more about bankruptcy, and exploring your options, it can be hard to know where to turn for help. Reach out to us at 1-888-527-8999, by email, or chat with us anonymously online with your questions and one of our credit counsellors will be happy to review your situation with you. Your counsellor will provide you with guidance and information so that you can make an informed choice about what will work best for you. We know that asking for help can be hard, but living with the stress and worry about your finances is harder. That’s why we’re here and available.