As personal debt levels increase, bankruptcy filings are on the rise in Canada. The stigma behind bankruptcy is certainly falling, yet many people are still afraid of both the bankruptcy process and what it means for them personally and financially.
Bankruptcy is a way to get out from under overwhelming debt payments and obtain debt relief. In 2019 alone, more than 45,000 Ontarians and 138,000 Canadians filed some form of bankruptcy to deal with a debt problem and get a fresh start.
The bankruptcy process begins with a meeting with a Licensed Insolvency Trustee who will perform a debt assessment. They will ask you questions about who you owe and how much, what you earn and what assets you have. The purpose of this assessment is to ensure that bankruptcy is the right solution based on your financial situation. Your trustee will review several alternatives to bankruptcy, including credit counselling and a consumer proposal.
If you choose to file bankruptcy, here is what that means to you.
What happens when you declare bankruptcy?
Bankruptcy in Canada is a legal process administered by a Licensed Insolvency Trustee, who ensures that all parties – both debtors and creditors – follow the rules set out in the Bankruptcy & Insolvency Act.
When you become bankrupt, you assign, or surrender, certain assets to the trustee and make specified monthly payments during the term of your bankruptcy. All money received is deposited in trust for your creditors in what is called your bankruptcy estate.
Assigning assets doesn’t mean you lose everything. When declaring bankruptcy, most personal belongings are exempt from seizure by the trustee. You can generally keep your car, RRSPs are exempt from seizure as are most personal belongings.
When you file bankruptcy, you get an automatic stay of proceedings against your unsecured creditors that:
- stops collection agencies from calling or suing you,
- can stop a wage garnishment,
- eliminates most unsecured debts.
As soon as you file bankruptcy, you stop paying your existing unsecured debt obligations. Your trustee will notify your creditors that you have declared bankruptcy. If creditors continue to call, you can tell them you have gone bankrupt and advise them to contact your trustee.
During your bankruptcy, you make your monthly payments, provide a monthly statement of income and expenses, and attend two credit counselling sessions.
Here’s what will not happen:
- your bankruptcy will not affect your spouses’ credit report
- your spouse does not have to file bankruptcy just because you do
- your employer will not be told unless you need to stop a wage garnishment
- your neighbours and friends won’t find out unless you tell them
- bankruptcy does not mean you will never get credit again.
Many agencies like to make bankruptcy sound like the end of the world. It is not. Bankruptcy means a fresh financial start. One of the most common bankruptcy myths is that it will ruin your credit score so much that you will never be able to borrow again. Nothing could be further from the truth.
Bankruptcy will remain on your credit report for 6 to 7 years after your discharge.
You can often get a credit card while bankrupt. We recommend you apply for a secured credit card; however, some credit card companies will offer a high-cost unsecured credit card depending on your payment history before bankruptcy.
If you get a credit card while bankrupt, be sure not to max out this card. Keep your balances low (no more than 30-40% of your credit limit) and pay off your balance in full each month. Doing so will help you rebuild your credit even while the bankruptcy notice remains on your credit report.
What happens to your debts?
The primary benefit of bankruptcy is the elimination of your debts.
Student loan debt can also be included in a bankruptcy if you have been out of school for seven years.
Bankruptcy will not eliminate support payments and court fines.
Bankruptcy does not affect secured debts like a mortgage or car loan. You will be required to keep making your monthly payments to secured creditors unless you voluntarily give up those assets as part of your bankruptcy.
Your creditors are entitled to file a claim against the money in your bankruptcy estate. Once your trustee approves this claim, they will be entitled to their pro-rata share of any money available in your bankruptcy. Trustee fees are included in your bankruptcy costs and come out of the monies paid to your creditors.
Just how expensive is bankruptcy?
Bankruptcy will relieve debts you can’t pay, which means you have more available cash flow from your income to pay for living expenses. There is, however, a cost to file bankruptcy.
If you have never been bankrupt before, have few assets and earn below the government surplus income threshold, bankruptcy will generally cost around $1,800 – or $200 a month for nine months. You will also lose at least one tax refund. If you file early in the year, you can lose two refunds, which is why timing matters when filing bankruptcy.
Bankruptcy is based on the concept that the more you earn, the more you pay. If you earn above the legislated surplus income limit, you will have to pay an extra penalty into your bankruptcy estate. Having surplus income also affects the length of your bankruptcy, which means you will be making these higher payments for longer.
Here’s the thing. Very few people pay this much in a bankruptcy. The reason being most people choose to avoid the surplus income penalty with a consumer proposal.
Should you file for bankruptcy?
The decision to file bankruptcy should be a financial one. If you can’t pay your debts as they become due, you are insolvent, which means you are eligible to file bankruptcy.
For you, bankruptcy may mean
- an end to harassing creditor calls
- no need to visit one payday lender to pay off another
- the elimination of high-interest debt
- a reduction in your monthly debt payments
- peace of mind and a fresh financial start.
Bankruptcy is always an option of last resort, but if you have more debts than you can repay, it is worth exploring. Book a free consultation with a Licensed Insolvency Trustee to learn more about how bankruptcy works and how it may help you get out of debt.