Know Your Options
Let the Trustees at Janes & Noseworthy walk you through the maze of information on financial management and restructuring. We are here to find the best solution for your individual situation.
When you are in financial difficulty, it is important to understand the available options so that an informed decision can be made. Regardless of which option may be favoured, it is important to obtain independent, confidential and well-reasoned advice from an experienced professional. Trustees are the only debt professionals who can provide a full range of financial solutions.
This option can be chosen if a person is not in a position to repay a reasonable portion of their debt. Bankruptcy is a government regulated process that provides immediate relief from most creditors. Legal proceedings and harassment by creditors will stop, with very few exceptions (such as obligations for child support).
A bankruptcy can be completed in as short as nine months. Most personal assets are exempt from seizure. A person who files for bankruptcy can generally keep all of their furniture and personal belongings as well as their home and vehicle. If a creditor has a valid secured claim to an asset (such as a mortgage on a home), it is most common that the payments will continue as normal during and beyond the bankruptcy, with no impact on possession of the home or other secured asset.
Payments in a bankruptcy are based on a person’s family income and are determined based on standards set by the federal government.
A bankruptcy can only be administered by a qualified Trustee licensed and regulated by federal legislation.
This option can be chosen if a person is unable to pay all of their debts, but is willing and able to repay some portion. The exact portion of debt that is repaid and the monthly payment required is determined based on family income and total debt obligations, and as agreed to by the majority of creditors.
A Consumer Proposal is governed by the same federal legislation as bankruptcy, and therefore provides the same legislated protection from legal proceedings and harassment. Protection is provided at least until the creditors have been presented with the proposal; once the proposal is accepted by the required majority of creditors, ALL creditors are bound by the terms of the proposal.
A proposal needs to offer creditors more than what they would receive in a bankruptcy, but a debtor can feel more in control as they are negotiating a settlement with the creditors (with the assistance of a government qualified person such as a Trustee). Such a proposal can have a more positive impact on credit rating in the long term, but requires less funds than paying creditors in full.
Informal Arrangements with Creditors and/or “Debit Counselling”
This option generally calls for repayment in full of all debts, although with a reduced interest rate. A Trustee and/or Personal Debt Counsellor can assist in such an informal arrangement. When you meet with a Trustee regarding your financial problems, they will assess whether this option is the best solution for your individual situation.
In recent years there has been an increase in “Credit Counsellors”, some of whom provide the service for a fee in addition to the amounts paid to creditors. In other cases, the operational costs of “Not for Profit” Credit Counsellors are funded through “donations” from creditors. You should check out the individual or organization carefully to ensure you are comfortable with their experience and qualifications.
A more troubling entry in the “Informal Arrangements” marketplace in Canada is something that has been banned in the United States – a service generally provided by what is known as Debt Settlement companies. Their ads trumpet that they can reduce Canadians’ credit card debt in the range of 60% to 75% without the “stigma” of bankruptcy. But, as is often the case, if it sounds too good to be true it usually is!
Another downside of informal arrangements with creditors is that there is no way to deal with dissenting creditors. Even if the majority of the creditors are in favour of the informal arrangement, one creditor could arbitrarily decide to pursue legal action such as attachment or garnishment of wages.
Debt Consolidation Loans or Refinancing
Banks and other financial institutions can sometimes refinance most or all debts into one loan. The potential lender makes an assessment of income, credit rating and ability to pay. All debt must be paid in full (plus interest charges) and the cost of such an arrangement can be significant.
Caution should be exercised before entering into such a contract. Interest rates can vary and the lender may require a co-signer and/or that certain assets be pledged as security for such a loan. If payments are missed, the lender could then pursue the third party who “guaranteed” the loan, or repossess the pledged assets.
A consolidation loan can also be dangerous if the lender is not able to include all debt into the loan, or if you still have to rely on credit cards to make ends meet. This option can often merely be a “band-aid” solution.