Borrowers who are knee deep in debt often think of bankruptcy as a solution of their financial problems. There are many alternatives, however, including credit counseling, consumer proposal, debt consolidation, negotiation with creditors, and others.
This is a solution for borrowers with multiple loans that allows repayment by taking a single loan. The main benefit is that customers are offered a lower interest rate. It is usually borrowers with student, auto, and private loans, missed and late payments, and other credit problems that resort to consolidation. Individuals with high-interest credit cards may transfer their outstanding balances to a card with a zero or low introductory interest rate.
This is another alternative to bankruptcy that is available to debt-ridden borrowers. It is a low-cost or free service that aims to educate consumers and teach them how to budget and avoid piling debt. Counseling takes place in the form of in-person sessions. The goal is to help borrowers to develop money management skills and create a personalized plan to help them solve their financial problems. Together with the counselor, the client reviews his sources of income, monthly expenses, budget, liabilities, and assets. The aim is to outline an action plan and spending recommendations based on the client's financial details and personal circumstances.
Filing a consumer proposal is yet another solution for borrowers with credit problems. This is an alternative for people who are unable to cover their monthly payments. A bankruptcy trustee is responsible for the arrangement. Some loans are not eligible, including auto and student loans and secured debts. Creditors have their own criteria and policies, and there is no guarantee that the proposal will be accepted. In essence, this is a settlement between a borrower and a financial institution to repay a portion of the outstanding liabilities. It is a legally binding contract that makes payments more affordable.
Relief can take different forms depending on the amount of the outstanding balance, the interest rate, and the financial situation of the insolvent consumer. It can be an arrangement to reduce the interest rate or the principal amount, to increase the term of repayment, etc. States, municipalities, institutions, corporations, small business owners, and individual borrowers are likely recipients.
Bankruptcy is a solution when nothing else works. There are different types – bankruptcy chapter 7, 11, 12, and 13. The latter is commonly used but more complicated. It doesn't involve liquidation but is more expensive. In essence, this is a solution that offers borrowers a chance to repay some of their creditors within a certain timeframe. Court approval is required in case the customer wishes to take out a new loan with a large balance. Some items and property are exempt while others are not, depending on the state or province of residence. Bankruptcy exemptions, for example, include public assistance, unemployment compensation, social security benefits, and health aids. The list of exempt property also includes household appliances, clothing, motor vehicles, tools of trade, and other items. There are items that are not exempt meaning that the debtor has to give them up. Examples are stocks and bonds, bank accounts, collections of valuable items and antiques, vacation homes and cottages, and others. Pensions and damages are exempt under chapter 7 bankruptcy, and the insolvent is allowed to keep the money. To claim exemptions, the borrower should present a description of each item. The fair market value of all items should be included as well. There is also a homestead exemption.