Obviously, if you are struggling with debt, bankruptcy isn't the first step you take. Just like Dana, you can look at other options, and for many people, they work.
The experts advise that you start with credit counselling and a debt management plan. Credit counselling is free, and taking an honest look at your finances with a pro can turn your situation around. (See "Online Help," page 3.)
Patricia White, executive director of Credit Counselling Canada, says there are all kinds of options that can be worked out with your creditors, such as reassessing the amortization period on your mortgage to reduce your payments and free up extra cash to pay off debt. It may also be possible to renegotiate interest fees on your debt.
If you have multiple debts, ask if they can all be consolidated into one larger sum. One debt and one payment is easier to manage. A consolidation loan may also come with a lower interest rate. Tip: If you go this route, cut up all your line of credit and credit cards so you don't rack them up again.
Another option to consider is the consumer proposal or "bankruptcy light." A trustee in bankruptcy comes up with a consumer proposal with your creditors for partial loan forgiveness, or to extend the period of time to pay it back. Wynberg says credit rating agencies generally delete consumer proposals from their records faster than bankruptcies.
When bankruptcy is your only option
For some people, such as Dana, bankruptcy is the only way to get out from under an avalanche of debt. "Bankruptcy can be harsh to acknowledge, but it's a legal and financial reality," says Smith. "People are entitled to get a fresh start."
Filing for bankruptcy will stop collection letters from your banks, phone calls from collection agencies and even wage garnishments through The Bankruptcy and Insolvency Act, which protects the rights of debtors and creditors in the event of bankruptcy. Then you send affordable payments to the trustee who distributes the money to your creditors. The amount of your payments are determined by the trustee in keeping with national guidelines.
There are some exceptions, however. For instance, you will have to continue making payments on secured debts for cars and homes that you still owe money on and plan to keep. Also, there are some debts that are not discharged from bankruptcy, says Powell, such as alimony and support payments and, in some cases, student loans.
Page 2 of 3 -- Think you know all about bankruptcy? Find 6 myths (and truths) about this complex topic on page 3.
