Bankruptcy. We see it as one of those ugly, better-left-unsaid words that elicit a strongly negative reaction. But is our distaste completely warranted? Sure, it’s not a pleasant concept, but so much of the stigma attached is due to commonly believed myths about bankruptcy that emerge from misconceptions and misinformation.
We hear certain myths about bankruptcy repeated time and again – by family, friends, colleagues, etc. – being presented as fact, when they are actually the opposite. So here at Hoyes Michalos, we’ve decided to debunk a few of the more common myths about bankruptcy in order to help you understand what it really involves.
Myth 1: Bankruptcy is a result of carelessness and unemployment
A study we conducted suggests otherwise. While financial mismanagement and over-extension of credit can indeed lead to bankruptcy, we found that in only 37% of cases this was the sole reason for filing. More common were causes that were unexpected, including job loss or pay reduction, illness or health-related issues, or relationship breakdown.
Also, we found that of all insolvent debtors who filed, 81% were working at the time of their filing. Most Canadians in financial difficulty aren’t lazy, unemployed or blasé with their money, but rather are good, hardworking people who have been forced into bankruptcy as a result of extenuating circumstances.
Myth 2: If I file for bankruptcy, everybody will know
The chances of friends, family and colleagues finding out that you filed for bankruptcy is very unlikely. By law, a trustee cannot release any confidential information regarding a bankruptcy unless they have a legal obligation to do so. And while bankruptcy and consumer proposals are a matter of public record, the chances of anybody – apart from creditors – searching through the archived records to find such information are remote.
Furthermore, your employer will not be informed of your bankruptcy by your trustee unless you want them to disclose this information. In cases where your wages are being garnisheed, letting your employer know you have filed will put a stop to the wage garnishment.
Watch our video for more information:
Myth 3: I will lose everything if I file for bankruptcy
A common myth about bankruptcy is that the insolvent will have everything seized once they file. In Canada, however, there are personal bankruptcy exemptions within certain monetary limits. While what you get to keep and what you lose in a bankruptcy can be complicated, generally, exemptions include:
- Household goods such as food and furniture
- Automobiles (up to a certain dollar amount)
- Pensions and retirement savings
Myth 4: Bankruptcy erases all of my debts
Contrary to popular belief, some debts cannot be discharged by filing bankruptcy. Usually, only unsecured debts – credit card debts, unsecured lines of credit, payday loans or past due bills – are discharged in a bankruptcy. Secured debts, which are guaranteed against assets (such as home mortgages), are not affected. Also, certain kinds of unsecured debts may not be erased, including alimony or child support and court fines and penalties.
Myth 5: Bankruptcy will ruin my credit, forever
While bankruptcy is a negative mark on your credit score, it puts you in better financial standing for the future than does ignoring your debts. Generally, a bankruptcy note will remain on your credit record for 6-7 years after you discharge, and a consumer proposal will remain for 3 years after successful completion of the proposal. After filing bankruptcy, you can immediately begin to repair and build up your credit.
When it comes down to it, the myths about bankruptcy are often far worse than the reality. Here at Hoyes Michalos, we can give you the advice and support you need to find the best possible solution to your debt issues, whether it’s a consumer proposal, filing for bankruptcy, or an alternative avenue.