Debtors generally speaking have two choices when facing overwhelming debt. They can ignore it, hope it goes away (it seldom does), move town and hope for the best. Or they can try to find a way through and rebuild their lives. Bankruptcy and debt settlement are the two commonest strategies Canadians follow as a way of getting through.
Debt Settlement Explained: How It Works
Debt settlement is persuading creditors to accept less than the full amount owed, and in final settlement. They may find this more attractive than being minor creditors after a bankruptcy judgement.
However, the defaulting debtor needs to have enough cash to make meaningful final payments. They also need watertight contracts to ensure the people they owe money to don’t come back for more. Hence lawyers are frequently involved in the process. When correctly seen through:
# Debt settling protects the debtor’s assets
# Debt settling provides a quick, clean solution
# Debt settling is final when creditors accept
Not all debt may be settled this way. For example student loans generally don’t qualify.
The Finer Details of Bankruptcy in Canada
Unlike debt settlement, bankruptcy is not an avenue open to all. In order to qualify, a person must:
# Have lived or done business in Canada within the last year
# Be insolvent, in other words unable to meet their financial obligations
# Owe at least $1,000 they are unable to repay by due date
A person declared bankrupt in court surrenders all their assets (in whatever form) to a licensed insolvency trustee. That person may then distribute the proceeds as a percentage of the outstanding debt. However, some debts, for example mortgages enjoy higher priority. This is why minor creditors often walk away with nothing.
The unfortunate debtor also walks away with nothing. Except the clothes on their back, the shoes on their feet, and a bad credit record, that is. Of course, they may be better off if their assets are in a trust, or in their partner’s name.
In this case a creditor may fight back by proving they made those arrangements to protect debt current at the time. The law’s intentions are to (a) permit an honest but unfortunate debtor to obtain relief from their debts, while (b) treating creditors equally and fairly.
Debt Settlement, Bankruptcy and Affordability
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