Most people view bankruptcy as the end of the road but in truth it's just a beginning. Whether you file for bankruptcy or are able to make a deal with your creditors through a proposal, the upside is that you will be debt free at the end of the process. so while there are a number of consequences of declaring personal bankruptcy – they are all things that can be dealt with.
Here's how you can better manage each step along the way and recover from the bankruptcy process more easily.
Financial Cost of Claiming Bankruptcy
You will be required to make payments during the bankruptcy process. These will be outlined by your bankruptcy trustee but are typically a minimum of $200 per month for the duration of the bankruptcy. In the event your income is higher or you have assets, these cost of claiming bankruptcy will increase. You can deal with keeping up with these payments by devising a monthly financial plan (budget). Keep in mind that while you’ll have to make monthly payments to the trustee, you’ll no longer be struggling to make minimum payments on debts that are included in the bankruptcy or proposal.
At Hoyes Michalos we offer pre-authorized monthly payments to make managing these payments easier as well. You can choose your payment term (weekly, bi-weekly, monthly etc.) based on your pay schedule.
Loss of Assets
You may lose some of your assets when you claim bankruptcy, such as any RESPs, stocks, or Canada Savings Bonds you may have had. If it’s important to keep these assets, you may want to consider a consumer proposal instead of the bankruptcy.
You don’t lose all your assets when you declare personal bankruptcy – you’re able to keep personal possessions (clothing, jewelry), furnishings, tools you need to earn a living, and even inexpensive vehicles. Your trustee will explain in detail how to determine what you do and don’t get to keep.
However, if you have filed and lost some assets, you can make a plan for rebuilding these savings and investments as part of your fresh financial start. Remember, once you have finished your bankruptcy your cash flow should improve significantly. Even before you are finished, monthly demands on your income often decrease because you are not trying to keep up with all those debt payments. With the improvement in your financial situation, you can begin to rebuild your savings, even putting money away towards a down payment for a new home if that is what you want.
Aside from turning over assets and making required payments, you will also be required to report your income monthly to your trustee and to attend two counselling sessions. There may be other meetings that your trustee requires you to attend as well. It’s important that you complete all your required duties in a bankruptcy as they’re an important part of the process and you won’t be discharged from bankruptcy if you don’t! Discuss with your trustee ahead of filing what the required duties will be so that you’ll feel prepared and ready to tackle them.
Impact on your Credit Score
When you declare bankruptcy, the Office of the Superintendent of Bankruptcy will register the fact that you filed on your credit report. Your credit rating will be recorded as an “R9” for the duration of your bankruptcy and the bankruptcy will remain on your credit report for a maximum of 7 years after you are discharged from bankruptcy if you’re a first-time filer, or 14 years for a repeat filer.
The best way to deal with this consequence of the bankruptcy is to work on the plan to rebuild your credit as soon as you are discharged from the bankruptcy. This could include obtaining a secured credit card, borrowing for an RRSP or borrowing money with some form of security given to the lender.
Keep in mind that in order to rebuild your credit, you need to USE credit (but responsibly). Here are some tips on how to do that:
- Pay all bills on time. If possible, always pay the balance in full to avoid excessive interest charges but at the very least pay the minimum amount due by the due date.
- Don't exceed the credit limit on your credit card.
- Don't apply for too many new loans. Continuous applications does not look good on anyone's credit report.
These, and more, strategies will be discussed as part of the counselling you’ll receive during the bankruptcy process.
The emotional consequences of declaring bankruptcy differ for everyone but in truth most are relieved once they file. The main reason for this is that they finally feel they have taken charge of the situation. There is nothing better than feeling some sense of control over your future. Once the process continues, you will also be relieved to find your financial situation improving. The remaining positive feelings just tend to snowball from there.
As always, every person’s situation is unique and it’s best to meet with a bankruptcy trustee to discuss the options that are available to you to deal with your debts. If the consequences of filing for bankruptcy sound like they would be too overwhelming for you to deal with it, there are other options such as a consumer proposal which may make more sense. If you do file for bankruptcy, the above noted consequences may feel like a small “price” to pay in return for ridding yourself of your debt!