Alternatives to bankruptcy: how we helped a client overcome $38,000 in debt

In summary:

• A consumer proposal is a popular alternative to bankruptcy because it allows individuals to repay a portion of their debts without interest while keeping their assets.
• The example below demonstrates that several options are available to reduce debt, including mortgage refinancing, a debt consolidation loan, and a consumer proposal.
• Each solution comes with its own advantages and disadvantages, which is why it is important to assess your situation with a qualified professional to determine the most beneficial option.

More than ever, Quebecers have options other than bankruptcy when dealing with debt. In fact, since the pandemic, the share of consumer proposals compared to bankruptcies has increased from roughly 50% to 75%. Today, 3 out of every 4 insolvency filings are consumer proposals. A consumer proposal is a settlement offer negotiated by a licensed insolvency trustee with your creditors. The goal is to reduce your debt to an amount you can realistically afford to repay. So why have consumer proposals become so popular?

For one, they are much better known than they used to be. Consumer proposals are now widely recognized as one of the most effective solutions for dealing with overwhelming debt. But there is another reason. A settlement offer requires some ability to repay, and many Quebecers are in a better position to do so than they were in the past. Quebec’s labour market has become one of the strongest in Canada, and the financial capacity of many households—excluding their debt obligations—has improved over the years. As a result, people who are unable to repay 100% of their debts, such as credit cards, lines of credit, and personal loans, are often able to repay a portion of them through a consumer proposal over a period of up to 5 years, without interest.

Consumer proposals also offer another important advantage: they allow individuals to keep their assets. This has become particularly attractive for homeowners whose properties have increased significantly in value since the pandemic.

These factors help explain why bankruptcy filings in Quebec have declined by nearly 50%.

That said, not everyone has the financial means to make a consumer proposal work. When other options are no longer available, bankruptcy remains a legitimate and respectable solution that can provide a fresh financial start.

Comparative analysis of alternatives to personal bankruptcy

To better understand the options available to someone struggling with debt, let’s look at the real-life example of Yan** and the different solutions that were available to him.

A passionate photographer, Yan spent years investing in expensive camera equipment and travelling to pursue his hobby. Over time, those purchases took a toll on his finances. Between credit cards, a line of credit, and a personal loan, he eventually accumulated $38,000 in debt.

Today, Yan is juggling 5 separate monthly payments totaling $780. While he has managed to stay current on all of his obligations, he can only afford to make the minimum payments required. With interest continuing to accumulate, he no longer sees a realistic path to becoming debt-free. That’s when he decided to meet with a debt professional.

A financial assessment conducted with a trustee helped evaluate Yan’s situation and outline the options available to him.  “The conclusion was clear,” explains Pierre Fortin, President of Jean Fortin & Associés. “If Yan continues making only the required payments, it will take him approximately 5 years to repay his credit cards and 17 years to pay off his line of credit. By then, he will have paid more than $24,000 in interest alone.” Fortunately, Yan had several alternatives available to him.

Option 1: Mortgage refinancing

As a homeowner, Yan could choose to consolidate his debts through mortgage refinancing. His home is valued at $270,000 and he still owes $175,000 on his mortgage, leaving him with approximately $100,000 in equity. By refinancing, he could use some of that equity to pay off his unsecured debts.

The main advantage is the lower interest rate. Assuming a mortgage rate of 4% and an amortization period of 20 years, Yan’s monthly mortgage payment would increase by only about $55. His credit rating would remain unaffected, and his debt-to-income ratio would improve significantly because the debt would be spread over a much longer period.

The downside is that extending the repayment period comes at a cost. The refinancing would effectively add several years to his mortgage, and the total interest paid would reach approximately $34,000, about $10,000 more than if he simply maintained his current repayment schedule.

Option 2: Debt consolidation loan

Another possibility would be a debt consolidation loan from his financial institution. Under this scenario, Yan would borrow $38,000 and use the funds to repay all of his existing creditors. He would then have only one monthly payment to manage.

The benefits are straightforward: a simplified payment structure, preservation of his credit rating, and a repayment period generally limited to 5 years. However, consolidation loans often carry interest rates between 12% and 15%, since the lender is effectively taking over the risk associated with the existing debts. In addition, approval is not guaranteed. Given Yan’s high debt ratio, the bank may be reluctant to approve the loan. Even if approved, the monthly payment would be approximately $845, and the total interest cost would still exceed $13,000.

Option 3: Consumer proposal

A consumer proposal would allow a licensed insolvency trustee to negotiate a repayment agreement with Yan’s creditors over a period of up to 5 years.
One of the biggest advantages is that interest stops accumulating as soon as the proposal is filed. This immediately reduces the overall cost of repayment and makes the monthly payments more manageable. If Yan offered to repay the full amount of his debt through a consumer proposal, his monthly payment would be approximately $633 over 5 years, with no additional interest. He would also be able to keep his home and other assets. The trade-off is that his credit rating would be affected. A consumer proposal generally remains on a credit report for 3 years after completion, up to a maximum of 6 years from the filing date.

The bankruptcy alternative our client ultimately chose

After reviewing all of his options, Yan ultimately decided to consolidate his debts through mortgage refinancing while maintaining the same remaining amortization period on his mortgage. Although this increased his monthly mortgage payment by approximately $270, it allowed him to save nearly $26,000 in interest and significantly accelerate his path to becoming debt-free. As Yan’s case demonstrates, debt consolidation can be an effective solution for homeowners with sufficient equity. In many cases, it allows debts to be repaid over a much shorter period and at a substantially lower interest rate. That said, it is important to ensure that the new payments fit comfortably within your budget and leave enough room for unexpected expenses.

The reality is that there is no one-size-fits-all solution when it comes to debt. Every option has its advantages and drawbacks, and the best choice will depend on your financial situation, your goals, and your ability to repay.

That’s why it is important to fully understand all of the options available to you and seek advice from qualified professionals before making a decision.

**Names have been changed to protect the individual’s privacy.**

By Pierre Fortin
Jean Fortin & Associés
Personal Finance Advisor
Licensed Insolvency Trustee