News about your credit

INDEPTH: PERSONAL FINANCE
Options for those in serious debt trouble
by Tom McFeat, CBC News Online | September 12, 2006

When debt trouble looms

The easy availability of credit makes some people think of a $1,000 television purchase as something entirely different. They don't think of it as $1,000 taken directly from their wallet or bank account. No, the reasoning goes, it's really just $25 a month for five years. That sounds a lot more affordable than $1,000. The only problem, of course, is that some people tend to think this way several times a year. And before they know it, they've racked up huge credit card debts they can barely service with even minimum monthly payments.

Quick Fact:

Number of personal bankruptcies in 2005: 84,638
Average debt owed: $60,965

Source: Superintendent of Bankruptcy

Add in something as common as a sudden emergency (like the need for a new roof, the loss of a job, divorce or a lengthy illness) and before they can say "Past Due," they find themselves in some deep financial waters, way over their head.

Fortunately, there are plenty of ways of dealing with that flood of debt. Filing for personal bankruptcy is definitely the last resort. There are plenty of other alternatives to check out before that route is chosen.

Credit counselling

Credit counselling agencies say that most of their clients tend to wait far too long to seek help. What could have been caught and corrected early with some simple budgeting advice often ends up mushrooming into a major problem that requires intervention with creditors.

Credit counselling services are available in most provinces. These agencies cost little or nothing for the consumers who use them. They're funded by government grants, charities, individual contributions and even the creditors themselves (they end up losing if customers can't pay their bills). These agencies see clients from every age group and income level. The sessions are confidential and the counsellors are non-judgmental. They know that anyone can run into debt trouble. And most say they've never been busier. The Credit Counselling Service of Toronto, for instance, counselled 53,000 clients in 2005, up 13-fold from 1990.

Credit counselling agencies say only a small proportion of their cases end up with a formal bankruptcy filing. Most of their cases are resolved with budget planning and money management advice, or through a variety of debt repayment programs.

Consolidation order

Debtors in British Columbia, Alberta, Saskatchewan, Prince Edward Island and Nova Scotia can apply for a consolidation order (also known as an orderly payment of debt program). Acceptance into these programs will result in the full payment of your debts within a set period of time (usually three years) and often at a lower interest rate. Debt collection phone calls will stop, your wages can't be garnisheed, and best of all, you will avoid bankruptcy. More information can be obtained from credit counselling agencies in the five provinces mentioned above. Credit counselling agencies in other provinces can also help debtors make informal proposals to creditors.

Consumer proposals

Consumer proposals aren't as well known as bankruptcy filings. But that's largely because they are relatively recent arrivals on the debt management scene. Ottawa amended the Bankruptcy and Insolvency Act in 1992 to make consumer proposals far more attractive to both debtors and creditors. More than 16,500 Canadians filed consumer proposals in 2005.

Warning Signs of Financial Trouble

1. Are you having trouble making payments on time?

2. Do you live paycheque to paycheque with little or no savings?

3. Are you using credit to pay for items that used to be handled in cash?

4. Is your net worth negative?

5. Are you paying only the minimum due on your credit cards?

6. Are you falling behind on necessities like rent and utilities?

7. Have you been stuck in an overdraft on your chequing account?

8. Are you putting bills off until the second notice?

9. Have you been bouncing cheques or pre-authorized payments?

Source: Credit Counselling Service of Sault Ste. Marie

Consumer proposals can be filed in every province and territory. Consumers propose some kind of modification to their scheduled debt repayment. That can include a proposal to repay a portion of the debt owed, or to repay the debt over a longer period of time, or some combination of both.

Such a proposal must give creditors more than they would get if the debtor filed for bankruptcy. And the debtor must have enough cash flow to meet his or her daily living expenses. But if all the other conditions are met (for instance, total debts excluding a mortgage, cannot exceed $75,000), and a majority of the creditors accept, then all the creditors will be bound by law to accept the proposal.

Once again, bankruptcy will be avoided and harassing phone calls from collection agencies will stop. And while consumer proposals and orderly payment of debt arrangements are entered into the consumer's credit reporting file, the information is purged three years after the repayment proposal is complete.

Bankruptcy trustees can help to arrange a formal consumer proposal.

Personal bankruptcy

For those who don't qualify for a consumer proposal and have debt problems so overwhelming that no other alternative can work, a voluntary filing for personal bankruptcy may be in order. But while filing for bankruptcy may have lost much of its stigma, it is still the solution of last resort, with onerous duties on the bankrupt and severe limitations on his or her financial conduct.

For one thing, a bankruptcy filing will require the filer to surrender all assets to a trustee in bankruptcy. There are only a few exceptions to what must be turned over and they vary from province to province. For example, in Ontario, bankrupts are allowed to keep a car worth up to $5,650, clothing worth $5,650, household effects worth $11,300, and tools worth $11,300. Everything else, including the family home, is up for grabs.

During the time someone is an undischarged bankrupt (which is a minimum of nine months), they must abide by a long list of requirements governing their financial affairs. For one thing, they must inform anyone they do business with that they are bankrupt. They must also attend at least two counselling sessions. They must turn over all their credit cards to the bankruptcy trustee. They must disclose all of their assets. Failure to do any of those things is a crime.

And while the bankruptcy process relieves debtors of most of their debts, some are still not wiped out. Alimony payments, child support payments, court-imposed fines, and student loans taken out less than 10 years ago must still be paid in full.

Even after a debtor is officially discharged from bankruptcy, one's new debt-free life will have some complications. It will be difficult to get bonded. And it will be virtually impossible to get credit for at least six years (14 years in the case of a second bankruptcy). That's the length of time a bankruptcy notation remains in a credit file.

And while bankruptcy is the last resort, it is also a fresh start and a necessary lifeline for many who have no other way of emerging from under a mountain of debt. It's a lifeline more than 84,000 Canadians had to take in 2005.