When you are dealing with a massive debt load, what are your options to get out of debt?
“One strategy is to declare personal bankruptcy. Although this strategy is appealing to many as it promotes a “clean slate” for your credit, it is typically seen as an option of last resort because of the long lasting impact on your credit and on your finances. If possible, you should consider debt consolidation, a debt management program or a consumer proposal first,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
If you are considering moving ahead with bankruptcy, here is an outline of the steps to filing bankruptcy in Canada.
Selecting your trustee
You are required to work with a Licenced Insolvency Trustee (LIT) who will help you file your bankruptcy paperwork, oversee the terms of your bankruptcy and work with creditors on your behalf.
When you initially meet with your LIT they will likely first examine if there are options available to you other than bankruptcy. If it is determined that bankruptcy is the appropriate option, the process will move ahead, starting with you filling out an application.
The information that you will need to disclose is your personal information (full name, address, DOB, etc.), any assets that you have and a list of your creditors.
Filing for bankruptcy
After the paperwork is completed, your LIT will file bankruptcy on your behalf with the Federal Government and advise your creditors. After you’ve filed for bankruptcy, your creditors are prohibited from contacting you or garnishing wages.
When you file for bankruptcy, it is very common that you will be required to sell some of your assets in order to pay creditors. Some assets are exempt from this process, but it varies from province to province. For example, in many cases you need to repay any equity that you’ve built up in your home. You could be looking at withdrawing RRSP contributions, selling cars and other property and more.
Monthly payment arrangements
As part of your bankruptcy agreement, you will be required to pay your LIT a fee for their services in overseeing your bankruptcy process. Additionally, depending on how much money you make, you will be required to make surplus income payments. If your income is above a certain amount, the Federal Government (through the Office of the Superintendent of Bankruptcy) will require you to make these payments above and beyond your cost of living.
As a requirement of filing bankruptcy, you will be required to attend credit counselling sessions to help you develop a good financial management strategy as you move forward.
If you fulfill all the criteria (i.e. attend credit counselling sessions and make required income surplus payments) it is possible that your bankruptcy can be discharged nine months after you’ve filed. If you’ve got a lot of surplus income payments to make, or if this is repeat bankruptcy, you can expect that timeline to take longer.
When you are discharged, your debts are essentially “cancelled”, but there will be a note on your credit report of your bankruptcy, which will stay in place for several years; this can impair your ability to take out credit for an extended period.
“The long-term impact on your financial future means that you need to seriously consider the implications before you file for bankruptcy,” says Schwartz.