Things to Try Before Filing for Bankruptcy
It’s best to avoid bankruptcy if at all possible. The ramifications of such a filing on your credit report is a killer. And it stays with you for at least seven years. This makes it hard to get credit of any kind (mortgages, credit cards, car loans, etc.). It can also make it hard to start a business. And in Canada you cannot be the director of any corporation if in the state of bankruptcy. These are just a few reasons NOT to declare bankruptcy. So what do you do when you are in trouble?
Consolidation Loan
This is where your bank gives you a loan to pay off all (or a portion) of your high interest credit cards and similar debt. It’s an unsecured loan and usually has certain requirements tied to it, such as getting rid of some of the cards. Of course you can re-apply for cards and dig yourself another hole, but that wouldn’t be wise. This loan usually lowers your monthly payments and has no early payment penalties. This is often the first thing you should try!
Orderly Payment of Debts
This isn’t available everywhere, but where it is available, it sure helps. This is a legal agreement between you and your creditors where your interest rates are lowered, also lowering payments, protection from legal action, and where you must attend some kind of credit counseling services in order to better learn to manage your finances. It’s available in Alberta, Saskatchewan, PEI, and Nova Scotia, and may be available in some States.
A Consumer Proposal
This is one step above Orderly Payment of Debts and just below bankruptcy on the least desirable list. A consumer proposal affects your credit rating as it is administered by a trustee, and it will show on your credit report for at least three years. In most proposals you end up paying no further interest on your debts, and you pay less than the full amount owing, because your creditors would rather accept a deal where they get something, than have you file for personal bankruptcy where they will get less.
As with any problems with debt, it is obvious that a budget was not followed! The more serious of these require credit counseling and you will have to make a budget. If you are not yet at that point, have a look at my budget spreadsheet (which you can download here), and that will give you a start.
I’m also starting a basic budgeting course for anyone interesting. Enrollment will start on January 2012. So look for that post! It’ll be cheap (like $25) and will include my advanced budget spreadsheet to anyone who enrolls.
