If you are swimming in debt, there are options to consider before choosing bankruptcy which should be the very last option, says Doug Hoyes, a licensed insolvency-trustee and co-founder of Hoyes Michalos.

There are options to consider before choosing bankruptcy says Doug Hoyes, a licensed insolvency-trustee. Start by taking inventory of what you owe, and to whom.

If you’re staring down the prospect of ballooning debt and worry you won’t be able to climb your way out, you might be wondering if or when you should declare bankruptcy.

There are options to consider before choosing bankruptcy — and it should be the very last option, says Doug Hoyes, a licensed insolvency-trustee and co-founder of Hoyes Michalos. First, he says, it’s good to take inventory of what you owe, and to whom.

When a client sit down to discuss options, the first step is to make a list of debts and determine if they are manageable, he says. “If you’ve got debt, but it’s at a really low interest rate, maybe it’s not a big deal,” Hoyes says.

Then, make a list of what is owned, such as a home or low-yield investment account such as a Tax Free Savings Account (TFSA). Using those assets, or selling extra assets (such as a car that’s not getting much use), could be a way to clear a portion of the debt quickly, he says.

The next option would be a consolidation loan, Hoyes says. If you have high-interest debts, consolidating those into a loan with a lower interest rate could make payments more manageable. Hoyes suggests working with your usual bank to see what options it will offer you, and cautions against shopping around for different loans because any rejected applications will count against your credit rating. That said, using a consolidation loan could end up being beneficial to your credit if you’re making regular payments, Hoyes says.

From there, the pathway out of debt becomes a bit more murky. If you’ve exhausted these options, the next step would be to consider a consumer proposal. In this case, a licensed insolvency trustee would work with you to approach creditors with a counter-offer, Hoyes says.

In a consumer proposal, an insolvency trustee will work out a monthly payment amount for a set number of years. After that period ends, the remainder of the debts would be cleared. There’s a catch, Hoyes warns: A consumer proposal will effect your credit.

Bankruptcy is the very last option, Hoyes says.

“There are some negative consequences,” he says. First, you’ll lose your non-exempt assets, such as any money you might have in a TFSA, or a car that has been paid off in full. The second consequence is the amount of money you’re able to earn while bankrupt. “If you are a single person with no kids, and you go bankrupt, you’re allowed to keep the first $2,355,” you make in a month, Hoyes says. Any remaining amount goes to the trustee to distribute to your creditors. This option will damage your credit for a minimum of six years from when your bankruptcy ends.

That makes bankruptcy an unaffordable option for many, he says.

JOIN THE CONVERSATION

Conversations are opinions of our readers and are subject to the Code of Conduct. The Star does not endorse these opinions.

More from The Star & Partners