When You Can't Pay Your Debts

The Dial-A-Law library is prepared by lawyers and gives practical information on many areas of law in British Columbia. Script 253 gives information only, not legal advice. If you have a legal problem or need legal advice, you should speak to a lawyer. For the name of a lawyer to consult, call the Lawyer Referral Service at 604.687.3221 in the lower mainland or 1.800.663.1919 elsewhere in British Columbia.

What should you do if you have money problems?
First, assess your overall financial situation. List your monthly expenses for food, rent, clothing, transportation, medical and dental fees, and all other regular expenses (for example, music lessons, if your child takes them). Include a monthly amount for annual expenses like car repairs and insurance. Also include an amount for emergencies—you may have to replace the family car, the TV, your computer or the furnace. Total this up, and then subtract it from your income. The amount left over is what you have to pay off your debts. 

Do you have to pay more on your debts each month than you can afford? If so, you’re getting further into debt and should consider the following options. Not all of them will work for you, but one of them may.

Options if you can’t pay off your debts
You can take any of the following steps. Each step is explained below:

  1. Solve the problem yourself.
  2. Use a debt-management program.
  3. Consolidate your debts.
  4. Apply for a consolidation order under the Bankruptcy and Insolvency Act.
  5. Make a formal proposal under the Bankruptcy and Insolvency Act.
  6. Declare personal bankruptcy, as a last resort.
  7. Take no action at all, in some very limited cases.

1.    Solve the problem yourself
Sometimes, you can cut back on non-essential monthly expenses, so you have more money to pay off debts. You can also try to increase your income enough to make all your monthly payments. Maybe you can get a second or part-time job. Or your spouse or family may be able to help with a gift or loan. Meanwhile, stop using credit cards—they charge very high interest rates. If you need to borrow, get a loan from a conventional lending institution like a bank or credit union. 

You can contact your creditors, outline your situation, and ask them to suggest ways to solve your problem. They may agree to a better deal that still lets you pay your debts, for example, by charging a lower interest rate, writing off interest, or giving you more time to pay. Be careful about agreeing to repayment schedules that may be too hard. Don’t borrow more money or put off other creditors—and be charged more interest—just to pay the creditors taking action against you. 

2.    Use a debt-management program
A debt-management program involves a written agreement between you and the lender, with the help of an agency such as the Credit Counselling Society of BC. Typically, your debts are consolidated, or combined, into one affordable monthly payment so you can repay them in a reasonable time. Creditors usually support people who use debt-management programs by reducing or eliminating interest charges.   

3.    Consolidate your debts
You may be able to get a consolidation loan from a bank or consumer finance company, which consolidates all your debts. You make just one payment each month. But the finance company will charge you a fee, and the interest may be higher. Also, you may have to use your personal possessions and household items as security for the loan. 

4.    Apply for a consolidation order under the Bankruptcy and Insolvency Act
If you have money available after your monthly budget costs, you could apply for a consolidation order under the orderly-payment-of-debts provisions of the Bankruptcy and Insolvency Act. This involves consolidating your debts into one payment a month, based on your ability to pay. Certain restrictions apply, and certain debts are excluded. The advantage is that creditors cannot take legal action against you unless you default on your monthly payments. But they may still be able to seize any property you used to secure the debt. A credit counselling agency or bankruptcy trustee can explain this process.

5.    Make a formal proposal under the Bankruptcy and Insolvency Act
If you have a regular income and can make meaningful payments over time, you can get help from a bankruptcy trustee to make a formal proposal to your creditors under the Bankruptcy and Insolvency Act. You can design the proposal to suit your situation and income. You may agree to pay in full, or in some smaller amount that creditors will accept. The repayment schedule can be up to five years.

The advantage of a formal proposal over a debt-management program or debt consolidation is that there’s an immediate “stay of proceedings” when you make the proposal. This means your creditors cannot start or continue any collection action against you. As long as the proposal is accepted—meaning that more than 50% of the unsecured creditors approve it—and you make your payments on time, the “stay” continues. Also, once you’ve successfully completed your proposal, none of the affected creditors has any remaining claims against you—even if they voted against the proposal. But if your proposal is not accepted, you will be declared bankrupt. 

6.    Declare personal bankruptcy, as a last resort
Sometimes, bankruptcy is the only solution. For this option, you need a trustee in bankruptcy. When you declare bankruptcy, you must “assign” or give your assets to the trustee, with some exemptions. The bankruptcy stays on your credit rating and can harm your ability to obtain credit for six years. 

7.    Take no action at all, in some very limited cases
If you have no income or possessions, your creditors may not be able to collect any money from you to repay your debts. Or if your debts are more than six years old, or if you haven’t made any payments or admitted your debts in writing in the last six years, and creditors haven’t taken any legal action, they may have lost the right to sue you. But you should speak to a lawyer before choosing this option. 

How do you decide what to do?

  • Getting free advice and counselling: The Credit Counselling Society of BC is a non-profit debt counselling service. They offer counselling about possible solutions to your financial problems and free debt-management workshops. They can help you set up a personal budget to regain control of your finances. And they can set up a debt-management or debt-settlement program for you. The Society has offices in Vancouver, Delta, New Westminster, Surrey, Abbotsford, Nanaimo, Kelowna, and Victoria. Generally, there’s no cost for their services. Their toll-free number is 1.888.527.8999. 
  • Get professional help:  A reputable, licensed credit counsellor or bankruptcy trustee can help. To find a credit counsellor, do an online search for “credit and debt counselling”. For a bankruptcy trustee, look for “bankruptcy trustee”. Or check with the Canadian Association of Insolvency and Restructuring Professionals at 416.204.3242. Most bankruptcy trustees will give a free first consultation to assess your financial situation and explain your choices and their consequences.

More information
Check the website section of the Office of the Superintendent of Bankruptcy Canada called Consumed by debt? Information for consumers on the insolvency process. Or call the Office at 1.877.376.9902. This website has other information on the bankruptcy process, consumer debt and consumer proposals.

[updated October 2017]

The above was last reviewed for accuracy by Robert Rogers and Barry Promislow, and edited by John Blois.

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