We understand that there is a lot of information to consider before filing for bankruptcy in Canada. If you have more unsecured debt than you can afford to repay on a monthly basis, bankruptcy could be the most efficient way to eliminate your debt. To help you get a clear picture of how this debt relief option will affect you, we have explained the pros and cons of bankruptcy below:
Pros of Bankruptcy:
- Harassing creditor calls will stop. When you file for bankruptcy, you receive an automatic stay of proceedings, which is a legal order your creditors must obey. This order gives you immediate creditor protection. Creditors will no longer be able to contact you for collection of debt or take any legal action against you either.
- Bankruptcy stops most wage garnishments. When you claim bankruptcy, your Trustee will notify your employer, the court, and the creditor to stop the wage garnishment. An exception is that bankruptcy cannot stop the garnishment of your wages by the Family Responsibility Office.
- Eliminate your debt. Once you are discharged from bankruptcy, with certain exceptions, you are debt free. While bankruptcy allows you to eliminate most of your unsecured debt, there are some unsecured debts that cannot be discharged. For example, student loans that are less than 7 years old, court fines, penalties, and child support are all debts that survive bankruptcy.
- Filing for bankruptcy will give you a target date for a clean credit report. Another benefit is knowing when you will be discharged from bankruptcy. This way, you can plan more easily how to start rebuilding your credit.
Cons to Bankruptcy:
- Bankruptcy costs money. You have to make bankruptcy payments based on your income, and may have to pay an administrative charge. The more you make, the more your bankruptcy costs and the longer it lasts.
- Bankruptcy lowers your credit rating. Filing for bankruptcy does affect your credit rating. A bankruptcy will be reported as an R9 on your credit report. It will remain on your report for 6 years after discharge for a first time bankruptcy. This will be extended to 14 years for a second-time bankruptcy. However, if you are unable to qualify for a loan before filing for bankruptcy, chances are, your credit rating is already very low and bankruptcy can be the first step to repairing your credit by eliminating your debt.
- You will lose any non-exempt assets. A common misconception is that you lose everything in a bankruptcy. The good news is there are many assets you can keep when you go bankrupt. Some non-exempt assets include RESPs and any contributions you made to your RRSP in the past year although we can help you build a plan to keep these savings if you wish. If your home has equity over $10,000, that equity will need to be paid into your bankruptcy however there are options that can allow you to keep your house when you claim bankruptcy. You will also lose your tax refund for the year in which you are filing bankruptcy, any prior year’s refunds that are outstanding, and your HST cheque.
- You have duties to perform in a bankruptcy. You need to perform all of your duties in order to get discharged from your bankruptcy. These duties include reporting your monthly income, making payments, attending credit counselling and providing income tax information. If you do not perform all of your duties, you cannot be discharged and your debts will not go away. Most people however don’t find this to be a disadvantage of filing bankruptcy. The process often helps them learn to better manage their money so they don’t find themselves dealing with too much debt in the future.
For many Canadians, the pros of bankruptcy far outweigh the cons. After all, once their bankruptcy is complete, they are debt free and have the fresh start they need to move forward.
However, if you are concerned about the cost of bankruptcy and also wish to keep your assets, like RRSP and home equity, consider learning more about a consumer proposal. A consumer proposal is another debt relief procedure under the Bankruptcy and Insolvency Act. It is a popular alternative to bankruptcy for Canadians who want to achieve debt relief and keep all of their assets.
Stressed about your debt? Give us a call at 1-866-747-0660 to talk about the benefits, and costs of filing bankruptcy.