There is a perception around bankruptcy that it gives a debt holder a fresh start, financially speaking. While it is true that bankruptcy does technically alleviate you from your debt obligations, there are a number of consequences that can last for years, which you should seriously consider before choosing bankruptcy as your debt relief option.
“Bankruptcy does offer a clean slate of sorts, there are other ways to become debt-free that are less damaging and less costly than declaring bankruptcy. Before you choose bankruptcy, make sure that you are fully aware of how it works, what the costs are and how this will impact your life in the years to come. Exhaust other options first,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
Are you at a debt crossroads and unsure about how to get out of debt? You might feel hopeless and that the only way out is to declare bankruptcy. Connect with a financial professional that you trust to help you evaluate all the options available to you to decide the best path forward. Call one of our trained credit counsellors at 1-888-294-3130 or check out our free online debt analysis.
Here is what you need to know about bankruptcy in Canada.
What is bankruptcy?
Simply put, bankruptcy is when a person carrying a substantial amount of debt and has fallen considerably behind in their debt payments decides that they are unable to pay their debts back. When declaring bankruptcy, the debt holder surrenders their assets to a Licensed Insolvency Trustee in exchange for eliminating debt.
There are rules and regulations around how bankruptcy works the costs, and around the actual surrendering of assets laid out by each province.
How do you qualify for bankruptcy?
In order to declare bankruptcy, you need to work with a Licensed Insolvency Trustee (LIT). They will evaluate your financial situation and determine if you are able to meet your debt obligations or not. Criteria to declare bankruptcy will vary depending on an individual situation, but in general an individual must be a resident of Canada, have more than $100,000 in debt and shown a consistent inability to pay their debts on time.
How does it work?
If the trustee declares you unable to pay your debt (insolvent) you will provide them with a list of your assets, detailed information about your outstanding debts and a list of your creditors, along with your personal information.
If you agree to file for bankruptcy the LIT will sell your assets in an effort to pay down as much of your outstanding debt as possible. Some of your assets will be protected from liquidation, but the rules around this vary from province to province. For example, you are generally able to keep your home but may be required to repay any equity that you have built up in it. You might have to withdraw RRSPs to repay debts. You will likely have to turn over things like cars (over a certain dollar amount) or other pricey assets. Personal items (unless they are very valuable) like furniture are usually not included.
The reason for protecting some assets under bankruptcy is to strike a balance between aiding a debtor who is in way over their head and to get creditors as much of the money that they are owed as possible.
The LIT will go ahead with filing your bankruptcy on your behalf. After the bankruptcy is filed, there will be a stay of proceedings, which means that creditors (for the unsecured debt) are not allowed to proceed with lawsuits, garnishing your wages or even contacting you for payment during this brief time period.
As part of your bankruptcy agreement, you will be required to make monthly payments (called surplus income payments) along with fees to your LIT. If your income surpasses a certain amount (based on the cost of living), you will need to pay any surplus to the Office of the Superintendent of Bankruptcy.
Another condition of filing bankruptcy is that you attend credit counselling sessions.
When will I be discharged?
If you meet all of the requirements (i.e. make all of your surplus payments and dutifully attend credit counselling) you can possibly get your bankruptcy discharged in as little as nine months. You can expect it to take longer if this isn’t your first bankruptcy or if you have a lot of surplus income payments to make.
“When you are discharged, your debts are cancelled for all intents and purposes. However, this is no “clean slate”. You will have a note on your credit history for several years to come, which will most likely make it very difficult (or even impossible) to get credit in the near future. This could significantly delay your financial and even your life goals, so declaring bankruptcy is something that you should think about seriously before you proceed,” says Schwartz.
It is important to note that not all debts are discharged; this covers unsecured debt only, like credit card debt, unsecured lines of credit, payday loans, taxes, utility and medical bills.
Do I have other options?
Absolutely. If you have adequate income to pay your debts, there are other ways to become debt free that don’t provide long-term damage to your credit like declaring bankruptcy does.
With a consumer proposal, you also work with a LIT who will work on your behalf with creditors. The idea is that you agree to repay a portion of your debt and your creditors agree to forgive a portion of your debt. This is a better option than bankruptcy because the damage to your credit isn’t as severe.
Another option is to participate in a debt management program with a credit counsellor. This helps you to become debt-free and also you to remain debt-free in the future. You learn about budgeting and are provided with support to improve your financial literacy. For more information, call us at 1-888-294-3130 or get started with our free online debt analysis.