Occasionally when I meet with someone considering bankruptcy, after reviewing their situation, I tell them they are “creditor proof” and so many not need to file bankruptcy right now. What does being creditor proof mean? Does it really mean they are protected from creditors? Well, yes and no. More importantly, how does that affect whether or when they might need to file for bankruptcy?
Purpose of Bankruptcy is Creditor Protection
The reason someone files for bankruptcy in Canada is to protect their wages or assets from collection actions from their creditors while they eliminate their debt. Debt collectors and creditors can take you to court and eventually apply to garnish your wages. However not all income can be garnished, like pension income, or you may not be working. And you may not own anything. In this case your creditors don’t have anything to collect from.
To be creditor proof, or collection proof, means you have no income or assets that can be seized for debt repayment. If you don’t have any wages or assets for creditors to seize, you have nothing to protect and so bankruptcy may not be necessary.
Does that mean I can’t be sued? No, you can still be sued. The difference is that even if you are sued there is little that can be done, you are in effect judgement proof in terms of the actions creditors can take. You don’t have any wages that can be garnisheed and you don’t have any assets that can be seized.
Collection of government debts is different. Certain rules don’t apply to Canada Revenue Agency (formerly known as Revenue Canada). The CRA does not need to go to court to take action to collect from monies they might owe you. If you owe money to the government for tax debts, student loans or a liability to CMHC, the government has the right to take your tax refunds and HST cheques until that debt is paid in full.
Can creditors take money from my bank account? If you owe money, say a credit card debt, at the same bank you deposit money, your bank can certainly take money out of your account to repay your credit card debt. This is call the right of offset. Other creditors can get a Court order and take money out of your bank account. And the CRA doesn’t even need a court order to do so.
Will the collection calls stop? No. Your creditors will continue to call however you can simply say you are not working and have no money to pay them.
What are your debt options if you are creditor proof?
If you are in this situation, it is important to review the cost of filing for bankruptcy versus the benefits of bankruptcy. If you file bankruptcy there is a minimum monthly payment to cover the costs of administration of your bankruptcy.
For some the correct answer is to do nothing until you are back to work because then you will be at risk of your creditors garnishing your wages. Once you know you will return to work, you should talk to your trustee so decisions can be made about the best time to file bankruptcy to keep your costs as low as possible.
If you do owe money at the bank where you have an account where any monies you receive are deposited, say your unemployment insurance or pension, we recommend that you open an account at a new bank and have your deposits (and any automatic payments) transferred there to avoid any chance your bank will seize future deposits.
If you have a large tax refund that can be seized, it may be more beneficial to save enough, or borrow from family, to cover the cost of filing bankruptcy so you don’t lose any tax refunds.
For others, the stress of dealing with the collection calls is too much to handle in addition to being off work. Some want to know that they can have their debt problems solved sooner rather than later. Again, if you can afford the minimum payments, and expect to return to work soon, you can choose to file early if you wish.
If you have debts and are not sure if you have income or assets that can be affected, contact us today to book a free, no-obligation consultation. We’ll tell you honestly if we think it would be better for you to wait to file bankruptcy because you are creditor proof.
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