Should I Declare Bankruptcy? Decision Factors To Consider First

Posted in Personal Bankruptcy
Posted by Joel Sandwith, BA - LIT

decision-factors-to-consider
If you are deep in debt you may be struggling with the decision about what to do about it. Is personal bankruptcy the best choice in your situation, or is there anything else you can do besides declaring bankruptcy?

The best way to approach the decision is to look at the major advantages and disadvantages of filing bankruptcy in Ontario and compare these to your alternatives.

Do You Qualify For Personal Bankruptcy?

First, do you ‘qualify’?  In order to qualify to file bankruptcy in Canada, you must owe at least $1,000, and be insolvent (which means basically you can’t pay everything you owe), and you must either reside, do business, or have property in Canada.  Let’s assume all those things are true – is personal bankruptcy the right choice?

Watch our short video or read further to understand the key factors in deciding whether declaring personal bankruptcy is the right choice or if you have other options.

Key Benefits of Declaring Bankruptcy

Bankruptcy is a legal means by which you can eliminate your debt. The objective is to allow someone who is insolvent to erase their debts and gain a fresh start. In exchange for this benefit you make payments for a set period of time, defined by bankruptcy law, and give up any assets you own that are not exempt by provincial and federal legislation. But why is bankruptcy a good choice to eliminate your debts?

  1. Bankruptcy provides an automatic stay.  When you file bankruptcy your creditors are notified and all actions against you stop.  This includes wage garnishments, lawsuits and collection proceedings.
  2. The terms and conditions for administering your bankruptcy are defined by the Bankruptcy & Insolvency Act. That means all parties are on an equal playing field.  You have the confidence of knowing your bankruptcy payments, as long as you complete them, will result in the elimination of your debt.
  3. Bankruptcy deals with all of your unsecured debts, with a few exceptions. That means you can eliminate not only credit card debt but payday loans, tax debts, lines of credit, and unpaid bills. Upon your discharge, your debts are eliminated.

Other Considerations for Filing Bankruptcy

Bankruptcy is not a cure all for all your financial problems. If the cause of your debts is overspending, bankruptcy will not solve that underlying issue. You are required as part of the bankruptcy process to complete two mandatory credit and debt counselling sessions.  The good news is you will learn beneficial skills in these sessions about budgeting and money management that can help you stay out of debt in the future.

Bankruptcy does not deal with secured debts like your mortgage or car.  If you are behind on your mortgage payments or car loan you are still at risk of having these assets seized by your creditors. However, filing for bankruptcy can improve your cash flow by eliminating your need to make payments on your credit card debt and other unsecured debts.  This can make it easier to keep up with your mortgage and car loan payments.

Do you have any seizable assets?  While there are exemptions that allow you to keep assets like most household furnishings, clothing and a car valued at less than $6,600, if you have significant equity in your home (beyond the seizure limits set by Ontario exemption laws) or investments, bankruptcy may not be your best option. Also, if your income is relatively good, you may need to know about surplus income.

Declaring bankruptcy does affect your credit ranking.  When you file bankruptcy a notice is placed on your credit report and will remain there for 6 years after your bankruptcy discharge. However, it is important to understand that over-use of credit, missed payments and poor lending choices will also negatively impact your score.  Filing bankruptcy can be the means by which you begin the process of improving your credit so you can borrower at a lower cost down the road.

A final consideration is whether you have been bankrupt before. A second time bankruptcy takes longer and costs more.

What Are Your Alternatives To Bankruptcy

I think another way to approach this is from the other side – is there anything you can do aside from declaring bankruptcy?

If you have no assets, and if your income is from social assistance, disability, pensions, sources that cannot be garnisheed, your creditors may not be able to do anything to you and bankruptcy may be unneccesary.

If your debts are small, if your cash flow and credit are good, or you have equity in your home, you may be able to borrow enough money to pay all of your debts, and have one, lower payment.  A debt consolidation loan however only works if you don’t add to your credit by continuing to use your credit cards and if your new payment is both affordable and pays off your debt in a reasonable time period.

Could you work with a credit counsellor?  A qualified, non profit credit counsellor may be able to help negotiate a repayment plan for you.  Let’s say you owe $30,000 – a credit counsellor may be able to set up payments for about $500 a month for 60 months on that amount.

If that payment is more than you can handle, perhaps a Consumer Proposal could be an option – on that same $30,000 in debt, it’s possible a consumer proposal could be set up with payments of as little as $200 per month for just over four years. Every situation is different, but that’s a good example of what a proposal can do.

Still not enough help?  Then declaring bankruptcy may be a good choice.

If you think declaring bankruptcy could be an option, call us, toll free at 310-PLAN (7526) or contact us online.  We would be happy to go over all of your options, at no charge and help you determine if bankruptcy is the right answer for you.