No one wants to file for bankruptcy. The stigma around debt relief programs like bankruptcy have led to the creation of numerous financial products that promise debt relief, but don’t always deliver. There are a lot of options out there that can land you deeper in financial trouble.
The two top debt relief options are bankruptcy and consumer proposal services – both programs that must be entered with a licensed insolvency trustee and that are legally binding for all of a debtor’s unsecured creditors. Other programs like debt consolidation and credit counselling don’t provide the legal protections or debt forgiveness, and can keep costing you in the form of interest charges.
Bankruptcy and consumer proposals differ in some key elements. For example, unlike with a bankruptcy, a consumer proposal will:
- Let you keep non-exempt assets;
- Establish a fixed monthly payment to creditors that doesn’t change with income;
- Affect your credit rating less.
However, both will provide you with:
- Reduced debt;
- A stop to interest charges;
- A stop to collection calls, wage garnishments, and other legal actions.
Both have lasting affects on your credit history, your ability to qualify for future loans, and your financial health, but in many circumstances they are more effective than other options you might see advertised, such as credit counselling or debt consolidation. Being able to identify when you should seek out debt relief can help you find the right help at the right time. Find out some of the red flags you should watch for if you’re in debt.
#1 You’re Facing Foreclosure
You can’t keep up on mortgage payments because of credit card bills, payday loans, and other unsecured debt. Foreclosure on your home can be worse than bankruptcy, and in many jurisdictions, some home equity is exempt from bankruptcy proceedings. In a consumer proposal, the reduced debt can give you breathing room to catch up on your mortgage.
#2 You’re Making Minimum Payments
Minimum payments on your credit card bills are designed to be more expensive in the long-term. Minimum payments stretch out your debt longer, accumulating large interest charges every month that mean you wind up paying more for the same debt. If you’re stuck making minimum payments every month, it may be a sign that you owe too much debt and need help getting out of it.
#3 You’re Getting Collection Calls
When your debt is moved to collections, that credit account gets the same rating it would if you went into bankruptcy. Many people are worried about filing for bankruptcy because of the impact on their credit rating, but if you’re getting collection calls, have had your wages garnished, or are being sued by creditors, the damage has already been done. Collection calls are stressful and invasive, while wage garnishments can interrupt your ability to pay for other important things like necessities or your mortgage.
Before you look into the other debt relief programs, you should find out what the long-term consequences might be to your finances and credit history. A consumer proposal should be reserved for dire circumstances, but pursuing other programs first might make the situation worse. Talk to a licensed insolvency trustee before going forward.