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Understanding last-resort options when you can no longer pay your debts

TORONTO — If you’ve found yourself with an overwhelming amount of debt, you can at least take comfort in knowing you’re not alone.

Canadian debt levels have been rising for decades, with the average family now owing $1.78 for each dollar of disposable income, compared with 66 cents for each dollar of income in 1980. Overall household debt has climbed 54 per cent in the last decade to reach $2.2 trillion.

The rising levels of indebtedness have left many households vulnerable, said Laurie Campbell, CEO of Credit Canada Debt Solutions Inc.  

“Debt levels have never been higher than they are now…there’s no wiggle room.”

For those feeling overwhelmed and unable to pay their debts, there are two regulated, last-resort options: bankruptcy, and the less drastic consumer proposal.

Both put a freeze on creditors and allow you to eventually get out of debt while only paying part of what you owe.

Under a consumer proposal the amount paid back is negotiated with creditors, while bankruptcy payments are set by laws that also require you to sell assets.

But people shouldn’t rush into either option despite the stress, said Campbell.

“It’s not something to be taken lightly.”

Campbell recommends first getting free advice from non-profit credit counsellors to look at your full financial picture, and explore gentler options like an interest freeze to help pay off debt.

She said there is a risk of falling back into debt if other budgeting issues haven’t been sorted out yet, while bankruptcy and consumer proposals have long-term implications that need to be understood.

“Everyone should look at all their options very carefully before making that decision, because it’s a very final decision.”

The bankruptcy process generally lasts either nine or 21 months depending on income, and then the bankruptcy stays on public record for six years. A consumer proposal generally lasts five years and then stays on your record for three more. A second and third bankruptcy have much longer terms.

During the bankruptcy process, a trustee will take stock of your assets and income to determine what needs to be sold and what you’re required to pay.

The law allows keeping essentials like clothes as well as a low-valued car and other assets, with rules varying by province. Bankruptcy also requires minimum payments of $200 a month through the process to cover administration costs, and significantly more if your income is above a threshold. For those unable to pay, the fee can be waived in certain circumstances.

If you have a house with a mortgage, you may be able to keep it if your equity in it is small and you can manage the mortgage payments. If your equity is above a threshold, which varies by province, you’d have to find a way to pay that back as well or the trustee would have the power to sell it.

Throughout the process you will also have to report your income and expenses on a monthly basis to the trustee. Any changes in circumstance, such as a raise or inheritance, could increase your payments.

Despite the requirements, the process is simpler than many fear, said Shelley Koehli, a licensed insolvency trustee in New Westminster, B.C.

“For most people that go through the bankruptcy, it doesn’t impact their way of life, other than they don’t have access to credit until they’re discharged.”

For those who don’t want to go through the bankruptcy process, or want to keep more of their assets, the consumer proposal is less invasive.

While a longer process, it provides more control on keeping assets while still only paying back part of your debts.

“It’s kind of that in-between option,” said Koehli.

Both a bankruptcy and a consumer proposal can cover unsecured credit and debt like credit card debt, unsecured bank loans, back taxes, lines of credit, payday loans and unpaid bills.

However, they will not deal with secured debt like your mortgage, secured car loan or lease. They will also not include debts like spousal or child support, court imposed fines and student loans that are less than seven years old.

Koehli said the biggest mistake is waiting to talk to someone. Some clients sell off assets they could have kept before approaching her, while others fear they wouldn’t be able to cross the border or that they may go to jail.

“No, we don’t have debtors’ prison anymore.”

Campbell also said it’s important to reach out for help as early as possible, even before the situation becomes desperate.

“Get help quickly. Don’t wait until it impacts every part of your life.”

Ian Bickis, The Canadian Press

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