Options Worse Than Bankruptcy? How Can It Be?

Options worse than bankruptcyThere’s a lot of shame that comes with declaring bankruptcy. For many people, choosing this option – even when it’s the only viable one that remains – feels like failure. In the U.S. in 2006, professors Deborah Thorne and Leon Anderson of Ohio University assessed the level of shame and stigma attached to bankruptcy and found that 95% of debtors experienced shame when they underwent the bankruptcy process. Later research by Michael D. Sousa at the University of Denver Sturm College of Law found that while these feelings of shame weren’t enough to prevent people from filing for bankruptcy, they did delay their decision to do so, causing them to make some desperate and disastrous financial decisions before they filed.

Make no mistake: Filing for bankruptcy is a last-resort option. That said, it’s still a better choice than some of the things people tend to do in an attempt to stave it off. Here are six options worse than bankruptcy.

More Debt

Many people who are struggling financially reach for credit and, at least at first, it seems like a good temporary fix, something to fall back on for a while. However, if you’re already struggling to make ends meet, have accumulated a lot of debt and are searching around for someone to give you a new credit card or to expand your line of credit, you’re probably already in big trouble. At this point, taking on more debt is a very short-term solution that does nothing but put more strain on your finances in the future. Bankruptcy isn’t the only option to consider at this point – debt consolidation, consumer counseling or a consumer proposal are all potential options – but no matter what you do it’s best to take action against your debt, rather than taking on more.

Payday Loans

Think the interest rates on your credit card are extreme? Think again. Those friendly looking payday loan shops that can now be found on nearly every street corner can charge annualized interest rates that are many, many times what you’ll find on any credit card. Because these loans tend to only be for a week or two, the $10 to $30 charge per $100 borrowed doesn’t seem so bad, but if you were to borrow that money over the course of a year, you’d be borrowing at an APR as high as 700%. These costs, along with the short-term nature of payday loans, can land people in a cycle of having to borrow more each month, just to get by, each time getting further and further behind. Plus, because payday lenders deal exclusively with cash-strapped clientèle, many of these companies can be highly aggressive when it comes to getting their money back. They may even clean out your bank account if you refuse to pay.

Foreclosure

Declaring bankruptcy in Canada won’t erase your mortgage debt because a mortgage is a secured loan, which essentially means that the bank has a right to repossess your home if you fail to pay. However, if your financial situation is making it hard for you to make your mortgage payments, bankruptcy may be a better option than allowing your home to fall into foreclosure. Because your credit card and other unsecured debts are discharged in bankruptcy, this may free up enough money for you to get current with your mortgage and continue to make monthly payments. This option will also ensure that you have somewhere to live. Plus, if you owe more on your home than its current market value, foreclosure can mean losing your home and still being in debt to the bank, which can sue you for the remaining balance. If you’re facing foreclosure, visit a bankruptcy trustee or credit counselor for information about your options.

Too-Good-to-Be-True Debt Solutions

There are many organizations in Canada that advertise themselves as credit counseling agencies. And, while there are many reputable organizations that help people with debt problems, there are also organizations that charge high upfront fees in exchange for too-good-to-be-true promises of debt reduction. In 2012, the Financial Consumer Agency of Canada (FCAC) issued a warning to consumers about unscrupulous debt settlement companies, which were entering Canada from the United States. Real, effective credit counseling exists. If you’re looking for it, avoid companies that make lavish claims about what they can do for you and make sure you choose a credit counselor with good credentials and appropriate certification. You can also ask a bankruptcy trustee in your area for a recommendation.

Lawsuits from Creditors

If you fail to make payments to a creditor for long enough, that creditor may choose to sue you in an attempt to collect its money. If you are sued and your creditor obtains a judgment against you, it may obtain the right to force you to make payments, garnish your wages or a savings account, or place a lien on your property. Not only is a court proceeding stressful, but if your creditor wins a judgment against you, you will lose all control over how you deal with that debt. Rather than letting things go this far, it may be better to visit a bankruptcy trustee about your options. Bankruptcy is likely to be one of them because it provides protection from lawsuits and harassment from creditors.

Cashing In Your Savings

In an effort to avoid bankruptcy at all costs, many people opt to cash in their savings in an attempt to stave it off. If your debt load doesn’t far exceed your savings, this may be a reasonable option, but things are trickier when it comes to cashing out RRSPs. Why? First of all, withdrawals from RRSPs are taxable in the year you receive them. So, if you make a significant withdrawal, you could bump yourself into a higher tax bracket, leading to a significantly higher tax bill at the end of the year. You should also note that what you’ll withdraw from your RRSP will be significantly less than what you have invested, because the bank will typically withhold 30% for taxes. If you can use part of your RRSP to pay off all your debt without incurring a huge tax bill, that may be an option worth considering. However, if you have to cash in all of your RRSP to pay of a small portion of your debt, you may be left with a big tax bill and no retirement fund to fall back on in the future. RRSPs are generally exempt from seizure by the court in bankruptcy because they help ensure that you’ll have a better financial future. Cashing them in to avoid the inevitable is a mistake.

Should You File?

The decision to file for bankruptcy is a difficult one. However, rather than considering this option, many people make even more devastating financial decisions in an attempt to avoid it. If you’re under serious financial hardship, visit a bankruptcy trustee for more information about your options.

About - David was initially drawn to accountancy because he was ‘good with numbers’. He has been an insolvency professional since 1993. Soon after he began to work with debt issues he discovered that the most satisfying part of his role was the ability to make a positive difference in other people’s lives. It is the person, not the numbers that continues to guide his approach toward helping others deal with debt issues.