Bankruptcy vs Debt Consolidation: Which option is right for you?

Canada Life - Jul 13, 2023
There are options out there when it comes to dealing with debt and overcoming it. In this article, we’ll break down two options: filing for bankruptcy and debt consolidation
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Hearing about rising inflation, higher interest rates and the costs of living in today's economy can be stressful. Don't worry, there are options available to you when it comes to dealing with debt and overcoming it: debt consolidation and filing for bankruptcy. 

What is Debt Consolidation? 

The goal of debt consolidation is almost the same as filing for bankruptcy: to get rid of your debts. With debt consolidation, you have more time to repay your debts and get lower interest rates. It's more affordable and easier to manage since you're only making one payment a month.

There are two ways to go into debt consolidation:

  • Debt Consolidation Program: work with a credit counsellor to come up with a plan to pay your creditors.
  • Debt Consolidation Loan: like any loan, there’ll be specific requirements they need from you. The loan will go into your bank account for immediate use and will have to be repaid in multiple installments over a specified period.

How do you qualify for debt consolidation? 

There is no specific amount of debt you need to go into debt consolidation. Your finances can help you decide if debt consolidation is a good option for you.  For example, if you have a good credit score and a decent income to pay off your debt consistently, debt consolidation may be the better option for you. It’s when you can't keep up with payments that you'll have to consider a more intense approach, like bankruptcy. 

What happens next? 

With debt consolidation, you’re still the one responsible to pay off your debts. There are three different options available to you:

  • Personal line of credit: you can get one through your bank that comes with a specific credit limit to help repay.
  • Home equity line of credit: a line of credit that uses the equity in your home as collateral. You may be able to get a higher credit limit, but it comes with the risk of foreclosing your home.
  • Credit card balance transfers: you can get all your debts put on one lower interest rate credit card, but this may come with many fees.

Things to consider before consolidating debt 

  • You must have a good credit score and income to pay off the debts.  
  • Low interest rates may only apply for a short period of time.  
  • It’ll stay on your credit report for two years after you complete the program.

What is bankruptcy? 

The main goal of filing for bankruptcy is to relieve yourself from most of your debts. It doesn’t get rid of all your debts, but it gives you the time to clear them without the headache of debt collectors, lawsuits and more.  

How do you qualify to file for bankruptcy? 

To file for bankruptcy, you need to meet these criteria: 

  • Be in at least $1,000 in debt  
  • The amount of debt you owe is more than the value of your assets 
  • Have low income

To file, you’d have to find a Licensed Insolvency Trustee (LIT), a professional who guides you through the process and speaks to your creditors for you.  

What happens next? 

Your LIT will help you sell your assets and organize your paperwork to give you the funds you need to pay off your debts. The bankruptcy process can last around nine months 

Things to consider before filing 

  • Your record will stay on your file for seven years. 
  • Some of your assets will be taken away.  
  • You’ll need to pay a court’s base contribution fee of at least $1,800 and other fees.

Although the bulk of your debts will be gone, it can become a barrier to your personal financial growth. The record of your missed payments or taken assets will be the first thing that creditors will see which could negatively impact you. 

When should you consider filing for bankruptcy vs debt consolidation? 

When it comes to personal finances, everyone’s situation is unique. If you're falling behind on payments, have many debts and don’t have the income to pay them off, bankruptcy may be the better option. If you have a good credit score and a steady flow of income coming in, debt consolidation may be for you.

Let’s talk about your options. Contact me today!