Can you file for bankruptcy if you have an active debt consolidation loan?

Can you file for bankruptcy if you have an active debt? 

Bankruptcy and debt consolidation loans are two very different approaches for handling your debt. Before following through with either of these methods, it is important to know the difference between each of them so that you can make an informed choice about what is best for your situation.

Bankruptcy vs. Debt Consolidation

Debt consolidation is best used when you think that you can repay your debts, but your high interest rates and multiple monthly payments just make it difficult to. Debt consolidation is a process of consolidating all your debt into one single bank consolidation loan. After negotiations, you usually receive a lower interest rate, and your debts are combined into one monthly payment; this makes it easier to pay more than the monthly minimum and reduce your debt.

Bankruptcy on the other hand is best used when you are no longer able to pay the minimum monthly payments towards your debts and you know you will not be able to pay it back. When filing for bankruptcy you must use the assistance of a Licensed Insolvency Trustee, they act as a neutral third party during the entire process. Bankruptcy can eliminate a great portion of your debts but will not eliminate secured debts (creditors who have the right to seize collateral if you default on a payment, like a mortgage or car loan), student loans less than 7 years old, and child support and alimony payments.

Debt consolidation and bankruptcy both affect your credit score.

Can you file for bankruptcy with an active debt consolidation loan?

You thought that you could pay off your loans using debt consolidation, but no matter how hard you try, your debt gets larger, and you are forced to file for bankruptcy. Its unfortunate, but it happens. It is important to understand how debt consolidation loans are treated in bankruptcy.

  • Unsecured debts: If your debt consolidation loan was used to pay off a credit card debt, it will be treated as unsecured debt, and you may be able to discharge it.
  • Student loans: If you used your consolidation loan to pay off student debt, it might be possible to discharge the debt. If your student loan is still owed to the government and it has been more than 7 years from your “end study date”, the debt can be discharged in a bankruptcy.
  • Mixed Loans: If you used your loan to pay off multiple debts (this could include unsecured debt and student loans) you may be able to discharge the loan. It is all dependent on your circumstances and you will need to discuss this with your Licensed Insolvency Trustee.
  • Bad faith: If you took out a debt consolidation loan and had no intention of repaying it, there could be additional terms to be completed before obtaining your discharge from bankruptcy, especially if you took out the loan within 3 months of filing for bankruptcy.

So, what should you do?

Before deciding about how to handle your debt, it is essential to talk with a reliable Licensed Insolvency Trustee. They can look at your financials, learn about your specific needs and expenses, and help you make an informed decision about your debt and which option will be best for you. If you have been denied a consolidation loan but also do not want to file for bankruptcy, a Consumer Proposal might be right for you.

If you have already filed a debt consolidation loan but are struggling to pay it back, reach out to Blanchard & Company in Red Deer. They are your number one choice in Central Alberta for a reliable and trustworthy Trustee who can help guide you back to the path of financial freedom.