Bankruptcy is often misunderstood and shrouded in internet myths and memes that can prevent people from seeking the financial help they need. In Canada, bankruptcy is a legal process designed to provide relief for individuals struggling with overwhelming debt. However, misconceptions about bankruptcy can lead to unnecessary stress and poor financial decisions.

If you’re considering filing bankruptcy or a consumer proposal, the best source of information is a Licensed Insolvency Trustee, an expert in personal insolvency. In this article, I will debunk 15 common bankruptcy myths, providing clarity and factual information to help Canadians make informed choices about their financial future.

Table of Contents

Myth #1. Only spendthrifts and financially irresponsible people go bankrupt

Contrary to popular belief, bankruptcy is not solely the result of reckless spending or financial mismanagement. A study on the causes of insolvency found that only 37% of debtors mentioned financial mismanagement and over-extension of credit as the sole reason for filing bankruptcy. More often, their debt was accumulated over time as their income could not keep up with rising living costs. They live paycheque to paycheque and use debt for daily living expenses.

Many Canadians who file for bankruptcy have faced unexpected life events that dramatically impacted their financial stability. Job loss, medical emergencies, divorce, or economic downturns can all contribute to financial distress, even for those who have been responsible with their money.

Myth #2. People who file bankruptcy are unemployed

This myth couldn’t be further from the truth. Studies indicate that approximately 81% of individuals who file for bankruptcy in Canada are employed at the time of filing. Many work full-time jobs but still struggle with overwhelming debt due to various factors such as high living costs, unexpected expenses, or past financial difficulties.

It’s important to note that bankruptcy filers come from all walks of life and employment situations. Some are self-employed, others work part-time, and a small percentage are unemployed or retired. Financial difficulties can affect anyone, regardless of their employment status.

For those with a higher income, a consumer proposal is often a better solution than personal bankruptcy. This is because in bankruptcy, the more you earn, the higher the cost. A consumer proposal allows you to spread potentially high monthly payments over a period of up to 5 years, interest-free.

Myth #3. Everyone will know if you file for bankruptcy

While bankruptcy is a matter of public record in Canada, it’s not as widely publicized as many people fear. In most cases, the only parties directly notified of your bankruptcy are your creditors, the Office of the Superintendent of Bankruptcy, and the credit bureaus.

Once you choose to file for bankruptcy (or a consumer proposal), some documents must be prepared and filed with the government, and this information becomes part of the public record. However, the information readily available to the general public is very limited and not easily accessible. If someone wants to see whether you filed insolvency, they must do a bankruptcy search and pay to see the results through the Bankruptcy and Insolvency Records of the Office of the Superintendent of Bankruptcy.

Your bankruptcy will not be advertised in newspapers or other public media unless you own significant assets or are involved in a business bankruptcy. Your employer will only be notified if there’s a wage garnishment that needs to be stopped. In reality, unless you choose to disclose your bankruptcy, most people in your life won’t know about it unless they conduct a specific bankruptcy search, which is not a common practice.

Myth #4. Bankruptcy will ruin your credit forever

While it’s true that bankruptcy will negatively impact your credit score, it doesn’t ruin your credit permanently. A first-time bankruptcy stays on your credit report for 6-7 years after discharge, while a consumer proposal remains for 3 years after completion.

It’s important to understand that if you’re considering bankruptcy, your credit score has likely already been significantly impacted by late payments, defaults, or high credit utilization.

You may even be surprised to know that many people who file for bankruptcy have a good credit score at the time of filing. This is because they never miss a minimum payment yet can’t pay their way out of debt.

Bankruptcy provides a fresh start and is often the first step in repairing your credit score. You can begin to rebuild your credit immediately after discharge. Many individuals find that with responsible financial habits, they can achieve a good credit score within a few years post-bankruptcy.

Myth #5. You lose everything if you go bankrupt

This is one of the most persistent myths about bankruptcy, and it’s simply not true. Canadian bankruptcy laws include provisions to ensure that individuals retain essential assets to maintain a reasonable standard of living. Each province has its own bankruptcy exemptions, but generally, you can keep:

Basic household furnishings and appliances
Clothing
Tools needed for your job
A vehicle up to a certain value (varies by province)
Some equity in your home (amount varies by province)
Registered Retirement Savings Plans (RRSPs), except for contributions made in the 12 months prior to filing

The goal of bankruptcy is to provide relief from debt, not to leave individuals destitute. A Licensed Insolvency Trustee can provide specific information about what you can keep based on your province and individual circumstances.

Myth #6. Government debts are not included in a bankruptcy

This is a common misconception. In reality, many government debts can be included in a bankruptcy filing.

Any tax debts you owe up to the date of bankruptcy are included in your bankruptcy as long as the CRA hasn’t placed a lien against your property, making it a secured debt. These typically include:

Income tax debts
GST/HST debts
Employment Insurance overpayments
Canada Pension Plan overpayments

However, there are some exceptions. For instance, student loans are only dischargeable if you’ve been out of school for at least seven years.

Myth #7. Bankruptcy is a scary and shameful process

While filing for bankruptcy can be emotionally challenging, it’s important to recognize that it’s a legal process designed to help individuals overcome financial difficulties. There’s no shame in filing bankruptcy when you’re overwhelmed by debt.

Bankruptcy is a tool for financial recovery, not a punishment. Licensed Insolvency Trustees are professionals who guide you through the process with empathy and without judgment. They help you understand your options and work towards a fresh financial start. Remember, financial difficulties can happen to anyone, and seeking help is a responsible step towards resolving your situation.

Myth #8. You can never get credit again after bankruptcy

While bankruptcy does impact your ability to get credit in the short term, it doesn’t permanently prevent you from obtaining credit. Many individuals can start rebuilding their credit immediately after discharge.

You can get a credit card during bankruptcy. We recommend you begin with a secured credit card specifically designed for those with poor credit. Over time, with responsible financial management, you can improve your credit score and qualify for regular credit products. Some people find they can qualify for a mortgage within 2-3 years after a bankruptcy discharge, though terms may be less favourable initially.

Myth #9. Bankruptcy will affect your employment

Filing bankruptcy will not affect your job, and your employer will not know you filed unless they need to be notified to stop a wage garnishment.

Certain professional occupations can be impacted by filing insolvency, including those that require you to be bonded.

Your income does, however, affect how your bankruptcy is administered. If your income is above a certain threshold, you may be required to make “surplus income payments” during your bankruptcy. These payments are based on your income and family size, and they go towards repaying your creditors. A Licensed Insolvency Trustee can help you understand how your income might affect your bankruptcy.

Myth #10. Bankruptcy eliminates all types of debt

The purpose of bankruptcy is to allow the honest but unfortunate debtor to obtain a discharge from most debts, subject to reasonable conditions. This includes:

Credit card debt
Personal loans
Lines of credit
Payday loans
Tax debts and

Outstanding bill payments

While bankruptcy can provide relief from many types of unsecured debt, it doesn’t eliminate all debts. Debts that typically survive bankruptcy include:

Secured debts (like mortgages or car loans)
Child support and alimony payments
Court-ordered fines or penalties
Debts obtained through fraud
Student loans, if you’ve been out of school for less than seven years

It’s important to consult a Licensed Insolvency Trustee to understand exactly which of your debts can be included in a bankruptcy.

Myth #11. You can’t file for bankruptcy more than once

It is legally possible in Canada to file for bankruptcy more than once. However, the process becomes more complex, and the terms are more costly with subsequent filings.

For a second bankruptcy, the discharge period is longer (24 months instead of 9 months for a first-time bankruptcy), and the bankruptcy will remain on your credit report for 14 years instead of 6-7 years.

If you are considering a second bankruptcy, talk with a Licensed Insolvency Trustee about other debt relief options like a consumer proposal.

Myth #12. Bankruptcy is always the best solution for debt problems

Bankruptcy can be an effective solution for overwhelming debt, but it’s not always the best or only option. There are several bankruptcy alternatives to consider, including:

Debt consolidation
Consumer proposals
Debt management plans
Negotiating with creditors

Each financial situation is unique, and what works best depends on your specific circumstances, including your income, assets, types of debt, and long-term financial goals. By law, a Licensed Insolvency Trustee must review all available options as part of your initial debt assessment. This assessment is part of your free consultation.

Myth #13. Licensed Insolvency Trustees (LITs) work for creditors

This is a common misunderstanding about the role of Licensed Insolvency Trustees (LITs) in Canada. LITs are independent professionals regulated by the federal government, specifically the Office of the Superintendent of Bankruptcy. They do not work for creditors, banks, or other financial institutions.

LITs are required by law to provide unbiased advice and consider the interests of all parties involved – debtors, creditors, and the general public. Their primary role is to administer bankruptcies and consumer proposals fairly and in accordance with the Bankruptcy and Insolvency Act. While they do have responsibilities to creditors, such as realizing assets for the benefit of the estate, their duty is to the integrity of the insolvency process itself, not to maximize returns for creditors at the expense of debtors.

LITs play a crucial role in helping individuals find alternatives to bankruptcy. At Hoyes Michalos, roughly 30% of the people we help end up filing a consumer proposal or bankruptcy, which means 70% will be provided with alternative advice and recommendations, including refinancing, credit counselling, and budgeting.

Myth #14. Bankruptcy is expensive

While there are costs associated with bankruptcy, the fees for bankruptcy are regulated by the government and are paid through the bankruptcy process itself, not upfront.

The federal government sets a minimum income threshold you keep to pay your ongoing living expenses. If you earn below this minimum, your bankruptcy will cost an average of around $200-$250 a month to cover administration costs. If you earn over this limit, you are required to make additional payments into your bankruptcy estate. Your Licensed Insolvency Trustee can explain how a consumer proposal can reduce the burden of high surplus income payments.

Most licensed insolvency trustees, including Hoyes Michalos, offer free initial consultations. So, it doesn’t cost you anything to sit down with us to review your financial problems and discuss the available debt solutions.

Myth #15. Your spouse will be responsible for your debts if you file for bankruptcy

In Canada, your spouse is not responsible for your debts unless they have co-signed on the debt or it’s a joint debt. Filing for bankruptcy does not transfer your debt obligations to your spouse.

However, it’s important to note that if you have joint debts, your bankruptcy will not eliminate your spouse’s obligation on those debts. They will remain fully responsible for joint debts even if you file for bankruptcy. This is an important consideration when deciding how to address your debt situation, especially for couples.

In conclusion, understanding the realities of bankruptcy is crucial for making informed decisions about your financial future. If you’re struggling with debt, don’t let these myths prevent you from seeking help. Consult with a Licensed Insolvency Trustee who can provide accurate information and guide you through your options. Remember, seeking help is a positive step towards regaining control of your finances and working towards a more stable financial future.

Debunking 15 Common Bankruptcy Myths in Canada