Understanding the Basics of Filing Bankruptcy
If you’re drowning in debt and feel like you can’t catch a break, filing for bankruptcy in Canada could be the lifeline you need. It’s a legal process designed to help those overwhelmed by debt start fresh. However, bankruptcy isn’t a one-size-fits-all solution, and understanding its ins and outs is crucial before making the decision to file.
What Does Filing Bankruptcy Mean?
In Canada, bankruptcy is a legal procedure that can help individuals who are insolvent—meaning they owe at least $1,000 and cannot pay their debts as they come due—get relief from their debts. Bankruptcy aims to either erase or restructure your debts so that you can move forward without that financial weight holding you back. It’s administered through a Licensed Insolvency Trustee (LIT), who will guide you through the entire process.
When Should You Consider Filing Bankruptcy?
Filing for bankruptcy in Canada is typically considered when all other options have been exhausted. If you’re struggling to make minimum payments on your credit cards, have fallen behind on mortgage payments, or have high-interest loans that keep accumulating, bankruptcy might be an option. However, it’s vital to explore all other avenues first, such as debt consolidation, consumer proposals, and credit counseling, before jumping into bankruptcy.
Types of Bankruptcy and Insolvency Solutions
In Canada, bankruptcy isn’t the only solution. The main types of insolvency solutions include bankruptcy and a consumer proposal.
Bankruptcy
Bankruptcy is often the last resort when you have no other way to pay your debts. When you file for bankruptcy in Canada, you assign your assets (except certain exempt property) to the Licensed Insolvency Trustee, who then sells them to pay off your creditors. After this process, most of your remaining debts are discharged, allowing you a fresh start.
Consumer Proposal
A consumer proposal is a formal agreement with your creditors to pay a portion of your debt over a specific period—up to five years. This alternative to bankruptcy is for individuals who have less than $250,000 in debt (not including their mortgage). It allows you to keep your assets, unlike bankruptcy, but you still make regular payments to the trustee, who distributes the funds to your creditors.
What Are the Benefits of Filing Bankruptcy?
Debt Relief:
Once you file for bankruptcy, most of your unsecured debts, such as credit cards, personal loans, and lines of credit, are erased.
Legal Protection:
When you file, there’s an automatic “stay of proceedings,” meaning creditors can no longer pursue legal action against you.
A Fresh Start:
Once you have received your discharge from bankruptcy, you’re free to rebuild your finances without the burden of overwhelming debt.
What Debts Are Included in Bankruptcy?
Not all debts are included in bankruptcy. Debts like credit cards, payday loans, and medical bills can be discharged, but there are some debts that remain, including:
- Student Loans (if they’re less than seven years old)
- Child Support or Alimony Payments
- Court Fines and Penalties
- Debts Due to Fraud
It’s essential to understand what debts will be cleared and which won’t before you proceed with filing.
What Happens to My Assets?
When you file for bankruptcy in Canada, some of your assets might be sold to pay your creditors. However, there are exemptions that vary by province, which may allow you to keep certain assets. For example, in British Columbia, you can keep up to $5,000 of equity in a vehicle and $4,000 worth of household furnishings. Each province has different exemptions, so understanding what you might have to part with is crucial.
Filing Bankruptcy and Your Credit Score
One of the biggest impacts of filing bankruptcy in Canada is on your credit score. Bankruptcy will stay on your credit report for at least six years after your discharge for a first-time bankruptcy. This means that obtaining new credit or loans during this period can be challenging, but it’s not impossible. Rebuilding credit after bankruptcy is a process that requires time, patience, and financial discipline.
The Cost of Filing Bankruptcy
Filing bankruptcy in Canada isn’t free. The cost can vary based on your situation and income, but typically it’s around $1,900 to $2,500. You will also have to make “surplus income payments” if your income is above a certain threshold, as set by the federal government.
The Process of Filing Bankruptcy in Canada
Filing bankruptcy in Canada involves a few key steps:
1. Meet With a Licensed Insolvency Trustee (LIT):
The LIT will assess your financial situation and discuss all available options, including alternatives to bankruptcy.
2. Sign the Bankruptcy Documents:
If bankruptcy is your chosen path, you’ll sign the necessary paperwork.
3. Fulfill Your Duties as a Bankrupt Individual:
This includes providing monthly income statements, attending financial counseling sessions, providing your income tax information and possibly making surplus income payments.
4. Get Discharged:
After completing all your duties, your debts will be discharged, and you’ll be free from those financial obligations.
Rebuilding Your Life After Bankruptcy
After your bankruptcy is discharged, the road to financial recovery begins. This involves:
- Creating a Budget: Start managing your money by tracking your income and expenses.
- Rebuilding Your Credit: Consider applying for a secured credit card and make payments on time to slowly rebuild your credit score.
- Setting Financial Goals: Think long-term about what you want to achieve, whether it’s saving for a home or becoming debt-free.
Alternatives to Filing Bankruptcy
Before making the decision to file for bankruptcy, explore all other options:
Debt Consolidation Loan: Combine multiple debts into one loan with a lower interest rate.
Debt Management Program: Work with a credit counselor to create a repayment plan.
Consumer Proposal: Negotiate to pay back a portion of your debt over time without going through bankruptcy.
Common Myths About Filing Bankruptcy
You Lose Everything: Not true—each province has exemptions that allow you to keep certain assets.
It’s a Quick Fix: Bankruptcy is a serious decision that comes with long-term implications, like credit score damage.
Only Irresponsible People File: People from all walks of life file for bankruptcy due to various circumstances like job loss, divorce, or medical emergencies.
FAQs About Filing Bankruptcy
1. How long does bankruptcy last in Canada?
For a first-time bankrupt with no surplus income, bankruptcy lasts 9 months. If surplus income applies, it extends to 21 months.
2. Can I keep my house if I file for bankruptcy?
It depends. If you have little to no equity in your home and keep up with mortgage payments, you may be able to retain it.
3. Will filing bankruptcy affect my spouse?
Your bankruptcy won’t affect your spouse unless they are a co-signer or guarantor on any of your debts.
4. Can student loans be discharged in bankruptcy?
Student loans can only be discharged if you have been out of school for seven years or more.
5. How often can I file for bankruptcy in Canada?
There’s no limit on how many times you can file for bankruptcy, but the consequences become more severe each time.
6. What is surplus income?
Surplus income is additional income above a certain government-set threshold. If you earn more than this amount, you may be required to make additional payments during bankruptcy.
Conclusion
Filing for bankruptcy in Canada is a serious decision that offers a chance for a fresh start but comes with its own set of responsibilities and consequences. It’s crucial to understand the process, the costs, and your other financial options before moving forward. Consulting a Licensed Insolvency Trustee can help you navigate these complexities and ensure that you make the best decision for your unique situation.
While bankruptcy may seem like a difficult road, it can be the first step toward taking back control of your financial life and moving toward a more secure and debt-free future.
Require Assistance?
At Crowe MacKay & Company, we have over 60 years of experience and offer free initial consultations. If you have any questions regarding the information above, contact our office today and start your debt relief journey.
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This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.
If you require corporate or personal insolvency services, Crowe MacKay & Company provides custom solutions for clients, allowing you to live debt-free.
