Some Canadians who have found themselves in the early stages of financial difficulty take action immediately to avoid any possibility at all they will end up declaring bankruptcy in Canada.

One of the first steps they take is determining where they are financially right now.  Exactly how much do they owe and what do they own?  That is a classic financial statement of net worth – your assets versus your liabilities.  Some homeowners with substantial equity take comfort in the belief they can always refinance their mortgages to take that equity out and use it if things get too difficult for them to manage.

In some cases that might be true, but for most Canadians who are beginning to get into financial trouble, the notion of refinancing a mortgage can lead to a false sense of security.

Depending on the nature of your troubles and the timing of your application, refinancing your mortgage may be well beyond your reach.  Even in normal times, it takes good credit to refinance. 

Some Canadians prefer to try to work things out on their own before seriously considering using the equity in their homes.  As part of that process, they often start using credit cards for much of their daily living expenses as well as to pay other bills.  The end result is they drive themselves deeper into debt.

Along the way, they might miss a payment or two, and even resort to Payday loans to catch up.  Missed credit card payments often lead to exorbitant increases in interest rates, adding even more to the total debt and increasing the time it will take to repay.

As their credit score decreases, so does their chance of refinancing their mortgage.  At best, they might be able to get a loan at exorbitant rates.  Even with credit scores that are still minimally acceptable, mortgage-lending institutions check credit reports thoroughly before making a loan.  In addition, they go beyond looking at the overall score.  It does not take an MBA in finance to spot a consumer who is struggling to keep up with the bills.

There is another force now in play that makes relying on refinancing your mortgage to avoid declaring bankruptcy in Canada in the future a risky proposition – tighter lending standards.

In early 2011, in reaction to record high levels of Canadian household debt, lending institutions and the federal government began taking steps to make it tougher to borrow money in the mortgage market. 

What all this means is simple – do not wait until it is too late.  Explore refinancing your mortgage as a way to avoid a Canada bankruptcy early in the process of sliding into financial trouble.  If your current debts are becoming overwhelming and you have significant equity in your home, consolidating what you owe through a mortgage refinance might make sense.  Work with a professional mortgage specialist, such as a mortgage broker, who has access to multiple lending sources.  Perhaps most important of all, remember you are not reducing your debt, you are only restructuring the way you are paying it back.  If your existing mortgage is $100,000 and you borrow $25,000 to pay off your credit cards, you still owe a total of $125,000.

Many Canadians need to learn how to live without excessive credit card spending.  Credit counseling from a licensed bankruptcy trustee or non-profit credit counselor can help.  You should know, some Canadians who refinance to avoid declaring bankruptcy in Canada end up there in a few short years anyway because they could not resist the urge to charge up their credit cards once they were fully paid off.