Bankruptcy is usually considered a last-resort type of option. Banks and creditors consider it a display of complete inability to manage your own finances. Which means that filing for bankruptcy is very damaging to your credit rating. Let’s take a step back and look at exactly what bankruptcy is.
Bankruptcy is a government regulated program and can only be implemented via a licensed bankruptcy trustee. The individual filing for bankruptcy is allowed to keep certain assets, often varying widely from province to province. In BC, you can keep household goods up to $4,000, one car worth up to $5,000 if needed for occupation, clothing. The tools of your trade, health aids and your principal residence if you only have $9,000 to $12,000 worth of equity. If you have more than this (which you likely do), it is very likely that it will be seized. As for Ontario, the items are largely the same but with slightly higher exempt amounts, apart from one huge difference. You are not allowed to keep any equity value on your home. So if you have equity in your home and can no longer afford to make the mortgage payments, you most likely will have it seized.
Once the assets that are not exempt have been settled by your bankruptcy trustee. The proceeds are released to your creditors and you are then free of any legal obligation to pay the unsecured creditors (the ones covered in your bankruptcy). For someone filing for the first time, this process typically takes around 9 months and will stick around on your credit report for 7 years from the date of discharge. This means 7-8 years of having no credit and only being able to purchase using cash, along with the other negative impact a poor credit rating can have; i.e. when looking for a job or trying to rent a home.
For these reasons, bankruptcy is a good last-resort option as it will deal with your debt problems and give you a clean slate. But due to the amount of time it takes to clean that slate, it should not be your first step when you are looking at debt relief options. Debt negotiation is really a very different animal and it’s interesting that people seem to view them as either/or options. In reality, debt negotiation is something you should look into way before you start looking seriously at filing for bankruptcy.
This option fails to provide some of the benefits of bankruptcy, which means your wages could still be garnished. You can still receive threats of litigation and collection calls are likely to still occur. It will also hurt your credit while you are enrolled in the program, as with any debt relief option. If you are looking seriously at debt relief, your credit rating is going to be taking a beating regardless.
Now, with all that said, using debt negotiation has three giant benefits. The first is that you are likely to end up paying around 50% of your original debt. So if you owe $10,000 and enter a debt negotiation program, you will probably only end up paying back $5,000 of the debt and your creditors will consider this payment in full. The second big plus is that debt negotiation programs. Particularly those offered by Cambridge Life Solutions, are incredibly aggressive. The goal is to eliminate your debt quickly, which means the plans have to be short. Typically, the plans range from 1-3 years and the length of each plan is determined on an individual basis.
This leads us into the third huge plus, which is the fact that your credit rating will be damaged for the least amount of time, as compared to other debt relief options. This is largely due to the fact that debt negotiation is not considered an official debt management program. With any other debt relief option, your initial defaults will give you an R9 rating on your credit score. This shows that you have outstanding debts which are out for collection. Joining an official debt management program will convert that to an R7, which states just that – this person is receiving help managing his/her debts. The thing about this is that a little note goes on your credit report and stays there to warn potential creditors. This note, in addition to the R7 while you are completing the payment plan, means that you cannot truly begin to rebuild your credit effectively for close to the same amount of time as a bankruptcy affects you.
Debt negotiation will give you that same initial R9 rating, where your accounts are out for collection. But it will not register an R7 and there will be no notations on your credit score stating that you needed help settling your debts. Once your negotiator has arranged for a lump sum payment of about half the original amount, you pay that (which you’ll have been saving up over the course of the program) and your debts are considered ‘settled in full’.
If you are able, debt negotiation is an option that makes it much more likely for you to hold onto your assets and quickly rebuild a credit rating. Bankruptcy should really be considered a last resort. Something to turn to if you are completely out of options. Some people will tell you that bankruptcy is a good idea if you have few to no assets. This can be true, but why wouldn’t you try debt negotiation first? It’s less of a hit on your credit rating, you end up paying less than your initial balance and it offers you the opportunity to rebuild your credit rating more quickly than any other option out there.
Disclaimer: Anyone consider to bankruptcy or consumer proposal should ALWAYS seek the counsel of a licensed bankruptcy/consumer proposal trustee. We are not attorneys and are not providing legal advice. This is article is just a synopsis of the differences between a bankruptcy and debt negotiation. Two very different debt relief programs.
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