Bankruptcy Alternatives in Canada: The Best Options

Many of us think bankruptcy is the only way to wipe the slate clean and start over when facing a debt crisis. But while bankruptcy might be the right step for some, there are plenty of alternatives to bankruptcy that should be considered first.

If you’re struggling to make ends meet, facing mounting debts, and considering bankruptcy, this guide is for you. We’ll explore bankruptcy alternatives in Canada, so you can decide which debt relief option best suits your financial situation.

Alternatives to bankruptcy

Fear not; bankruptcy is not the only way out of debt – you’ve got options. Here are some of the best bankruptcy alternatives in Canada.

1. Manage your money better by budgeting

Sometimes all it takes to get out of debt is better money management through personal budgeting. It’s so simple that it is often overlooked as a bankruptcy alternative.

A budget involves tracking your income, bills and other expenses to reduce how much money you spend, allowing you to pay off your debt faster and set realistic saving goals.

For many of us, a strict budgeting plan can quickly reduce unnecessary outgoings, with the extra money used for debt repayment.

Think of personal budgeting as an autopsy of your finances, allowing you to reorganize your future spending priorities. A good starting point is the 50/30/20 budgeting rule.

Can you cut back on takeout, socializing, treats, alcohol, or clothes? Can you reduce your energy consumption, renegotiate monthly payments, or cancel subscriptions? Check out our money-saving guide for more ways to save money in Canada.

You can set out a budget using a spreadsheet or using pen and paper, but there are many budgeting apps that automate the entire process.

2. Sell assets to reduce debt

If you want to eliminate debt and avoid bankruptcy, you might choose to sell some of your assets. Assets are things like your house, car, jewellery and other tangible property.

Doing so allows you to raise cash quickly to repay debts, and you can avoid damage to your credit score caused by bankruptcy.

However, there are some catches. Selling important personal assets like your home and car is a significant step that could cause more problems than it solves. There’s also the possibility that you may not receive full value for them, leaving you unable to pay the total debt.

Before you decide, seek advice from a financial professional, such as a Licensed Insolvency Trustee, who can help you decide if selling assets is the best solution to your debt problems.

3. Negotiate with your creditors

Try calling all your creditors to negotiate lower payments or repay debts on better terms, such as a temporarily reduced interest rate for a reasonable period. You can also offer to settle the debt in exchange for a reduced lump sum payment.

Debt restructuring doesn’t reduce your debt but can lower or freeze your monthly debt payments by reducing the interest costs on loans or extending due dates.

If your creditors accept, it could give you time to catch up on your unsecured debts and avoid bankruptcy. But as it’s an informal process, they don’t need to accept.

If you are undergoing financial difficulties, it may be helpful to reach out to your service providers and inquire about the possibility of receiving a temporary discount or accepting reduced payments for a specified period.

Some mortgage providers offer an emergency payment break, typically allowing you to skip one monthly payment every twelve months.

4. Get student loan debt relief

Federal student loans offer flexible repayment terms, like extended repayment options and interest-only payments, allowing you to lower your monthly payments.

There are also government and provincial student loan forgiveness programs that can forgive or cancel student loan debt.

The Repayment Assistance Plan (RAP) assists Canadians with student loan repayment difficulties. If you meet the eligibility requirements, the federal government will reduce or eliminate payments for as long as you are eligible.

In 2020/2021, 309,000 borrowers got help through the RAP.

If you make less than $40,000 a year, you don’t have to make payments towards student loans. If you earn more, the most you have to pay is 10% of your household income.

4. Set up an informal debt settlement

An informal debt settlement is an alternative to bankruptcy that requires a little time, effort and money upfront. You ask each creditor if you can reduce the debt owed by paying a lump sum to settle the debt.

If your creditors see that you’re experiencing financial hardship, they may be willing to accept a reduced amount if they think they are likely to receive less money if you declare bankruptcy. However, they could also make unreasonable demands, making debt settlement too expensive.

Creditors don’t have to agree to informal debt settlements. They are not legally binding agreements and may fancy their chances of getting more money if you file for bankruptcy instead.

5. Taking out a debt consolidation loan

Debt consolidation is a popular bankruptcy alternative because it lets you combine multiple unsecured debts into a new loan with one monthly repayment.

This approach does not lower your total debt but can reduce the overall interest rate you’re currently paying on your debts. A single loan also makes managing your debt easier than making multiple individual payments.

Bad credit is the biggest stumbling block for most potential debt consolidation loan applicants; it requires a stable income and a good credit score. Some loans require collateral to secure the loan, which you could lose if you fail to pay.

It can also be tricky to find a lender that offers a large enough debt consolidation loan that lets you include all of your debts.

A debt consolidation loan term typically lasts 1-5 years and may temporarily lower your credit score for a short period.

6. Set up a debt management plan

A debt management plan is a repayment plan where you offer to fully repay your debts within an agreed period, usually within three years.

You make a monthly payment to a credit counselling agency, which administers the debt management plan. Your credit counsellor distributes debt payments to your creditors, and you pay fees to the credit counselling agency.

Decreasing or eliminating interest and fees on your debts is possible, but you must fully repay them. As it is a voluntary arrangement, creditors are not legally obligated to accept the plan.

You can include most unsecured debts in debt management plans, including credit card debt, loans and lines of credit. However, student loans, taxes and secured loans cannot be included.

If you decide to enter into a debt management plan, a record of this will appear on your credit report, and your credit score will be affected.

7. File a consumer proposal

Before declaring bankruptcy in Canada, you might want to consider filing a consumer proposal as a bankruptcy alternative to deal with overwhelming debt.

A consumer proposal is a government debt relief program that lets you make a formal debt settlement offer to your creditors.

You agree to repay a percentage of your debts to your creditors. After you make these payments, the total outstanding balance is forgiven. The amount forgiven depends on your debt situation, but you could reduce your debts by up to 80%.

Like debt consolidation, it combines multiple debts into one single monthly payment, which can be paid over a maximum of five years.

Personal assets are protected in consumer proposals; you won’t lose your home or car. Interest rates, wage garnishments, and debt collection action will stop. Creditors and collection agencies cannot contact you.

Unsecured debt, like personal lines of credit, loans and credit card debt, can be included in a consumer proposal. You can even include CRA debts and student loans. Secured debt is not included, but you can give up the asset and include the debt.

Like bankruptcy, a consumer proposal is a government-regulated legal process under the Bankruptcy and Insolvency Act.

A consumer proposal administrator called a Licensed Insolvency Trustee acts as a fiduciary, meaning they are required by law to serve the best interests of you and the creditors.

Like most debt relief programs, a consumer proposal affects your credit score and appears on your credit report for 3-6 years after completion.

Overall, filing a consumer proposal is one of the best ways to avoid bankruptcy in Canada.

The best bankruptcy alternative

If you can sell some assets, manage your money better or enter into an informal negotiation to reduce your debt, then you might be able to avoid bankruptcy.

A debt consolidation loan is a good debt restructuring option for those with good credit. It may help you reduce your debt’s interest rate by taking out a new loan to combine all your debts. However, you must repay the entire amount owed.

Debt management plans can be costly as you must pay your debt in full and pay a fee to the credit counselling agency.

A consumer proposal is one of the best alternatives to bankruptcy

Out of all the alternatives to bankruptcy, a consumer proposal is a safe, legally binding debt relief solution which can:

• Reduce how much you pay.
• Protect your assets.
• Stop legal action.
• Freeze interest rate on debts.
• Consolidate your debts into a fixed monthly payment.
• Avoid declaring bankruptcy.

How much you’ll repay in a proposal depends on how much you can afford to repay, your debts, creditor expectations, income, and assets.

To get a general side-by-side comparison, use our consumer proposal calculator.

Is filing bankruptcy bad?

There’s a stigma around personal bankruptcy, but for many, it’s the best choice available to them.

Some alternatives to bankruptcy don’t make financial sense for some. Bankruptcy might be the best choice if you:

• are overwhelmed with debt
• have little or no income
• have no assets
• have more debt than you can afford to repay, and you can’t meet your financial obligations
• have legal action pending for your debts or are receiving a wage garnishment.

Bankruptcy is a government-regulated legal process under the Bankruptcy and Insolvency Act.

Bankruptcy won’t ruin your credit forever

It’s often believed that filing bankruptcy will ruin your chances of ever obtaining credit again, mainly due to the perception created by banks and lenders.

A first-time bankruptcy will drop off your credit report six to seven years after completion, and you’ll recover to have a better financial future.

Find a suitable bankruptcy alternative today

Filing bankruptcy in Canada should be treated as a last resort, but it helps many people start over.

That being said, most people have a good chance of avoiding bankruptcy and becoming debt free if they choose one of the bankruptcy alternatives above.

If you need help understanding the alternative debt relief options available, talk to a Licensed Insolvency Trustee today.

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