Many Canadians are under the mistaken impression they need to use a professional debt consultant to deal directly with their creditors if they find themselves in serious financial difficulty.  The fact is, it is not only possible to deal directly with your creditors in most cases, the potential of declaring personal bankruptcy in Canada gives you the leverage you need to negotiate successfully.

First, you should know that in some circumstances there is no point in dealing directly with creditors.  What your creditors are interested in is getting back as much of what you owe as they can at the least cost to them.  If you have lost your job or for some other reason are in the situation of having almost no income, you need a bankruptcy trustee.  To qualify for any of those debt settlement programs you hear advertised, you must have some income.

However, with income you can actually use the possibility of declaring personal bankruptcy in Canada to your advantage in dealing with creditors.  Here is how.

If you qualify for bankruptcy, your unsecured creditors will lose almost all of what you owe them.  To qualify you must have at least $1,000 in debt and be insolvent.  Insolvency means you cannot stay current with your existing bills, either through your income or through your assets. If you have $100,000 in unsecured debt but you own a vacation property with equity of $150,000, you do not qualify.  You could sell the property and settle your debts.

Very few Canadians are in that situation.  Most in financial trouble are struggling along with little room for error.  That error often rears its ugly head in the form of legal credit collection activity, most notably wage garnishments.

When confronted with an actual garnishment order – not just a threat – many Canadians rush to the protection offered by the bankruptcy courts.  To maximize the leverage you have over your creditors, you need to demonstrate to them that a declaration of personal bankruptcy is a real possibility in your future.

You do that by thoroughly documenting your personal financial situation.  You have to itemize to the penny what you owe and what you own as well as how much you make and what your living expenses are. 

You also have to demonstrate you are serious about getting back on sound financial footing, and that bankruptcy will be your last resort.  A personal budget where you cut expenses to the bone is something you want to create and share with your creditors.

When you hire a debt consultant to negotiate settlements with your creditors, they determine monthly payment you can make to go towards debt repayment while keeping you out of bankruptcy.

You can do the same thing.  Examine what you owe each creditor and figure out what you can afford to pay them.  Find a good debt payoff calculator on the net and see what kind of interest rate reduction you might need to repay either your total debt or a reduced portion over 5 years.

With documentation in hand, start calling your creditors.  Explain the situation and tell them to expect your documentation and then make your proposal.  If your debt is small, propose to pay it all over time with reduced interest.  If you have substantial debt, propose a reduction in the principal that allows you to repay the balance over five years.  What you are proposing is exactly what a debt settlement professional might propose.

Why should your creditors agree?  First, they know they will get next to nothing if you are forced into bankruptcy.  In addition, they know those debt settlement companies charge hefty commissions and fees.  If you negotiate on your own, that money can go towards repayment.

Finally, you need to know lending institutions are also experiencing financial difficulty.  Defaulting on loans is cutting into their profits as is the expenses they incur trying to collect what they are owed.  If you can present them with a viable proposal, they have a financial interest in accepting it.  Their alternatives are legal costs to come after you and the real possibility they get nothing if you go end up declaring personal bankruptcy in Canada.