Debt Relief Experts
If you’re struggling with overwhelming debt, you may be considering bankruptcy as a potential solution.
Most people view bankruptcy as the end of the road, but in truth, it’s just the beginning. While there are a number of consequences of declaring bankruptcy in Canada – they are all things that can be dealt with. Understanding what happens when you declare bankruptcy in Canada is crucial for making an informed decision about your financial future.
Table of Contents
Do You Qualify to File Bankruptcy?
To be eligible to file bankruptcy, you must:
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owe at least $1,000 in unsecured debt
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be insolvent (which means you are unable to pay your debts as they become due), and
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you must either reside, do business, or have property in Canada.
To file for bankruptcy, you must meet with a Licensed Insolvency Trustee. LITs are regulated by the Office of the Superintendent of Bankruptcy and are the only individuals authorized to administer bankruptcies in Canada. Bankruptcy is a legal process, and the role of the LIT is to ensure that all laws and regulations in the Bankruptcy and Insolvency Act are followed properly.
When you work with an LIT, they will:
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Assess your financial situation and explain how bankruptcy works
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Explain your options, including alternatives to bankruptcy
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Help you complete the necessary paperwork if you decide to file
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Manage the bankruptcy process, including dealing with your creditors
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Conduct mandatory financial counselling sessions
Immediate Effects of Declaring Bankruptcy
When you file for bankruptcy, an automatic stay of proceedings comes into effect. This legal protection stops most creditors from taking action against you, including wage garnishments, lawsuits and collection calls and letters.
Upon filing bankruptcy, you stop making payments to your unsecured creditors.
Bankruptcy law requires your LIT to notify all creditors within five days of your bankruptcy proceeding. This notification includes a copy of your bankruptcy documents, a list of your assets and debts, a monthly budget, and forms to allow them to file a proof of claim to funds distributed from your bankruptcy. Creditors are prohibited from collection efforts once they receive this notification.
If you continue to receive calls from collection agencies after filing insolvency, inform your creditor that you have filed bankruptcy and give them the name of your trustee.
Financial Implications of Bankruptcy
Your debts are eliminated
Bankruptcy can eliminate many unsecured types of debts, including:
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Credit card balances
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Personal loans
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Payday loans
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Student loan debt if you have been out of school for seven years
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Utility bills
Some debts survive bankruptcy, including child support and alimony payments, court-ordered fines or penalties and debts obtained through fraud.
Bankruptcy does not deal with secured debts like your mortgage or car. If you are behind on your mortgage payments or car loan, you are still at risk of having assets, like your car, seized by your creditors. However, filing for bankruptcy can improve your cash flow by eliminating your need to make credit card debt and other bill payments. This can make keeping up with your mortgage and car loan payments easier.
Potential loss of assets
Bankruptcy does require you to surrender certain assets to your trustee; however, in most cases, don’t lose all your assets when you declare personal bankruptcy. Allowable bankruptcy exemptions mean you can keep personal possessions (clothing, jewelry), furnishings, tools you need to earn a living, and even an inexpensive vehicle. Your trustee will explain how to determine what you do and don’t get to keep.
If you do have assets you’d like to keep that would be forfeit in a bankruptcy, you may want to consider a consumer proposal instead of bankruptcy.
Even if you have filed and lost some assets, you can make a plan for rebuilding any savings and investments as part of your fresh financial start. Remember, your cash flow should improve significantly once you have finished your bankruptcy. Even before you are finished, monthly demands on your income decrease because you are not trying to keep up with all those debt payments. With the improvement in your financial situation, you can begin to rebuild your savings, even putting money away towards a down payment for a new home if that is what you want.
Surplus income payments
The basic cost of bankruptcy typically starts at around $200 per month, but this can increase with high earnings. If your income is above the allowable federal government limit for your family size, you may be required to pay surplus income, which can increase the cost of your bankruptcy and lengthen the duration of your bankruptcy. A first bankruptcy with no surplus income lasts 9 months and is extended to 21 months if you have surplus income.
Required Duties
During your bankruptcy, you have some responsibilities. Bankruptcy duties include attending two financial counselling sessions, reporting your income and expenses monthly, making any required bankruptcy payments, and attending any required meeting of creditors. Failure to complete all your duties will delay your bankruptcy discharge.
Considering bankruptcy?
Long-Term Consequences and Recovery
Bankruptcy discharge
Your bankruptcy discharge marks the end of your bankruptcy and the point at which you are legally released from your debts.
In Canada, a first-time bankruptcy typically results in an automatic discharge after 9 months if you do not have surplus income, provided you’ve fulfilled all your duties during the bankruptcy period. This is extended to 21 months if you do have surplus income. A second bankruptcy lasts a minimum of 24 months and 36 months if you have surplus income.
Credit score impact
Declaring bankruptcy does affect your credit rating. When you file bankruptcy, a notice is placed on your credit report and will remain there for 6-7 years after your bankruptcy discharge (or 14 years for a second bankruptcy). However, it is important to understand that overusing credit, missed payments and poor lending choices will also negatively impact your score. Filing bankruptcy can be how you begin improving your credit so you can borrow at a lower cost down the road.
Rebuilding credit
While bankruptcy affects your ability to get credit, rebuilding credit after bankruptcy is possible. After bankruptcy, you can start rebuilding your credit:
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Check your credit report for errors and ensure the dates of your bankruptcy and discharge are accurate.
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Apply for a secured credit card and use this card responsibly. Making payments on time will help you establish a better credit history and increase your credit score. Over time, you can access additional credit at better interest rates.
- Don’t exceed your new credit card limit. We recommend keeping your balances below 35% of your credit limit. A low utilization rate will help increase your credit score after bankruptcy.
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Maintaining a stable income and residence is also necessary to obtaining credit.
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Avoid taking on too many new debts, as this will reduce your creditworthiness to new lenders and may limit your ability to reach future financial goals.
Life After Bankruptcy
While filing bankruptcy can be very emotional, most people feel relief from a fresh financial start. After bankruptcy, you’ll need to focus on rebuilding your financial stability. This includes:
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Attending mandatory financial counselling sessions
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Creating and sticking to a budget
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Building an emergency fund
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Learning about responsible credit use
The key reason for declaring bankruptcy is to eliminate debt. Your bankruptcy discharge effectively draws a line under your past financial difficulties, allowing you to move forward and rebuild your finances without the burden of overwhelming debt.
Exploring Alternatives to Bankruptcy
Before deciding on bankruptcy, your trustee will help you explore other debt relief options, including:
The do-nothing approach
If you have no assets, and if your income is from social assistance, disability, pensions (income sources that cannot be garnisheed) your creditors may not be able to do anything to you and bankruptcy may be unnecessary.
Debt consolidation
If your debts are small, if your cash flow and credit are good, or you have equity in your home, you may be able to consolidate all of your debts and have one, lower payment. A debt consolidation loan however only works if you don’t add to your credit by continuing to use your credit cards and if your new payment is both affordable and pays off your debt in a reasonable amount of time. You can read this article to see if debt consolidation is better than bankruptcy.
Debt management plan
Could you work with a credit counsellor through a debt management plan (DMP)? This program allows you to negotiate a repayment plan to repay 100% of your debt with interest relief. Let’s say you owe $10,000 – you may be able to set up payments for about $167 a month for 60 months, which would repay the total amount over five years. While it is not commonly known, credit counsellors do charge to administer a debt management program. Credit counselling fees range from 10-15% of the debts repaid through a DMP.
Consumer proposal
If you have assets that may be seized through bankruptcy, have high surplus income and cannot afford a debt management plan, a consumer proposal could be an option. While both offer legal protection against creditor actions, your LIT can help you explore the differences between bankruptcy vs consumer proposal.
Get a Free Debt Assessment
Declaring bankruptcy is a significant decision that can provide relief from overwhelming debt, but it comes with benefits and consequences. It’s crucial to understand all aspects of the bankruptcy process and consider alternatives before making a decision.
If you think declaring bankruptcy could be an option, contact us today for a free consultation. Remember, bankruptcy is not the end of your financial journey but rather a fresh start and an opportunity to rebuild your financial future.
