Explore Your Options for Overcoming Debt Without Filing for Bankruptcy

Charlotte Miller

Debt today is as common as it’s ever been. Everyone gets into debt sooner or later, whether it’s through student loans, credit card debt, or a first mortgage.

While debt is a normal part of everyday life, it becomes overwhelming when we struggle to keep up with debt payments. Interest rates make it tough to bring down debt, and a sudden loss of income or unexpected expenses can make it all too much to handle.

Secured vs. Unsecured Debt: Knowing the Difference

Before you create a financial plan for dealing with your debt, you should identify the different types of debt that you have. There are two main types: secured and unsecured debts.

Secured debt is money that you’ve borrowed that is secured against collateral. In many cases, the collateral is the asset that you’ve purchased with the loan. For example, a car loan is secured against the vehicle that you’ve purchased, and a mortgage is secured against the property. When you can’t keep up with secured debt payments, the lender can take power of sale. They sell the asset and collect the proceeds.

Unsecured debt is not borrowed against any collateral. This includes things like student debt, taxes owed, credit card bills, unpaid utility bills, payday loans, etc. You have more options for dealing with these types of debts, such as relief options that can lead to debt forgiveness.

What Options Do You Have for Dealing with Unsecured Debt?

There are several ways you can approach overwhelming unsecured debt, and each has its own pros and cons.

#1 Consumer Proposal

Consumer proposals have become a popular debt relief option in Canada for people who are overwhelmed by unsecured debt. To get a consumer proposal, you have to work with a Licensed Insolvency Trustee like Bankruptcy Canada to go through the formal process.

In order to qualify for a consumer proposal, you have to be insolvent, i.e., your total unsecured debts exceed your assets. If you do qualify, there are several advantages:

  • The amount of debt you have to repay can be significantly reduced.
  • You can hold onto any assets that you would have to give up in bankruptcy.
  • You benefit from a longer repayment period that can make repayments more manageable.
  • Once you file a consumer proposal, you’re protected from collection actions, such as wage garnishments, legal proceedings, and collection calls.

#2 Credit Counselling

When you go this route, you work with a credit counsellor who will attempt to negotiate with your creditors to reduce the amount of debt that you owe.

Credit counselling is a more informal process than a consumer proposal. It is not a legally binding process, and it does not provide the same protections against collection actions. This means that there are no guarantees when you opt for credit counselling.

The Government of Canada advises caution when looking for credit counselling and reminds consumers to be aware that there are fees involved in counselling.

#3 Using Assets to Repay Debt

An asset might be property that you own or savings that you have for an emergency fund or retirement. Using these assets to repay unsecured debt can make unmanageable debt payments reasonable again or entirely clear your debt.

However, you have to carefully consider what you’re giving up. If you sell your house to pay back unsecured debt, you can wind up facing rent payments that are higher than what your mortgage was.

Options like consumer proposals can help you hold onto those assets, although there will be an effect on your credit score.

When you’re facing insurmountable debt, consider all of your options. Bankruptcy is not the only way.