What's better bankruptcy or debt settlement?

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In Canada, choosing bankruptcy offers a legal shield, wiping out most unsecured debts but affecting your credit score for up to 7 years due to the loss of non-exempt assets. Debt settlement allows negotiating debt reduction while retaining possessions but lacks full legal protection. A consumer proposal is a structured settlement preserving assets with legal protection, less damaging to credit. Consult a Licensed Insolvency Trustee, but choose wisely, not all trustees can be trusted. Reach out via phone, text or live chat if you have any questions.

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Bankruptcy And Debt Settlement Question

What’s better bankruptcy or debt settlement? I’m weighing my options between bankruptcy and debt settlement but don’t know which one is the better choice for my situation.

From: Anonymous Question
Location: Brantford, Ontario (ON)
Category: debt settlement

Bankruptcy And Debt Settlement Answer

In Canada, deciding between going bankrupt and settling debt primarily hinges on your financial goals. If you declare bankruptcy, you get a legal shield from those pesky creditors and say goodbye to most unsecured debts, albeit by giving up non-exempt goodies. The downside? It may haunt your credit report for up to 7 years, which means your credit score could take a substantial hit. Debt settlement, on the flip side, is like bargaining for a deal where you pay less than what you owe and keep your stuff, but it doesn’t offer the same legal protection from creditors and might leave a shorter mark on your credit history.

There’s also the savvy option of consumer proposals, kind of a friendly debt settlement that’s by-the-rules. This allows you to repay a slice of what you owe while clutching onto your assets and comes with legal shields. Plus, it’s wiped from your credit report three years after you wrap it up. It’s crucial to have a heart-to-heart with a Licensed Insolvency Trustee to sift through your options, but pick wisely since not all trustees are cut from the same cloth. They’ll be your guide to navigating the best financial waters for your circumstances.

From: Insider Scott

Office of the Superintendent of Bankruptcy (OSB) Answer

Choosing between bankruptcy and debt settlement largely depends on your financial situation and long-term goals.

Bankruptcy, as outlined in the Bankruptcy and Insolvency Act (RSC 1985, c 11, section 2), provides a legal process for individuals to eliminate most debts and receive a fresh start. However, it remains on your credit report for six to seven years, significantly impacting your creditworthiness.

Debt settlement involves negotiating with creditors to pay a portion of your debts in a lump sum. While this may be less damaging to your credit report than bankruptcy, it may not eliminate all debts and can still lead to tax implications, as forgiven debt may be considered taxable income.

If you have assets you wish to retain and can manage some payments, debt settlement may be more favorable. Conversely, if you are overwhelmed by debt and cannot realistically meet payment obligations, bankruptcy might be a more viable option according to the provisions in the relevant legislation.

Consider your specific circumstances, including the total amount of debt, income level, and asset protection needs, in making your decision. It may also be beneficial to consult with a Licensed Insolvency Trustee for tailored advice.

From: OSB Helper

Related Questions to If Bankruptcy Is Better Than Debt Settlement

Here are the top 5 most frequently asked questions related to the comparison between bankruptcy and debt settlement, based on current trends and concerns:

1. What are the differences between bankruptcy and debt settlement?

• Bankruptcy is a legal process that eliminates debts but involves surrendering non-exempt assets and impacts credit scores severely, while debt settlement is an informal negotiation to reduce debt amounts but lacks legal protection[1][4].

2. How does bankruptcy affect my credit score compared to debt settlement?

• Bankruptcy typically has a more severe and longer-lasting impact on your credit score, staying on your report for 7-10 years, whereas debt settlement also negatively affects your credit score but to a lesser extent[1][4].

3. Can I keep my assets in bankruptcy or debt settlement?

• In bankruptcy, you may have to surrender non-exempt assets, while debt settlement allows you to keep your assets but requires paying a portion of the debt you owe[1][2].

4. Which option provides legal protection from creditors?

• Bankruptcy provides legal protection from creditors, including an automatic stay on collection efforts, whereas debt settlement does not offer the same legal protections[1][4].

5. How long does each process take to complete?

• Bankruptcy typically resolves debt more quickly, often within 9-21 months, while debt settlement can take several years to complete[1][2].

If you have a question about debt see our debt questions or ask your own debt related question.

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