If you can’t keep up with debt payments, you may wonder if it’s time to file for bankruptcy. Bankruptcy isn’t a one-size-fits-all solution, nor is it always the correct answer for everyone. It’s a significant legal and financial step that requires careful consideration.

Anyone can find themselves facing severe debt. Financial struggles don’t discriminate by age. Young adults aged 18-29, often grappling with student loans and early career instability, account for 15% of bankruptcies. The highest proportion, 32%, falls in the 30-39 age range, where many face the combined pressures of career advancement, repaying student loans, building a family, and the desire for home ownership. Middle-aged individuals aged 40-49 represent 26% of filings, potentially dealing with career setbacks or family-related expenses. Those in their 50s make up 16% of bankruptcies, possibly due to unexpected job loss or health issues. Even Canadians 60 and older aren’t immune, accounting for 11% of filings, as fixed incomes may struggle to keep pace with rising costs. These statistics underscore that financial difficulties can arise at any point in life, whether from personal circumstances, economic downturns, or unforeseen events.

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Signs You Might Need to Consider Bankruptcy

Many Canadians struggle to make ends meet and take on consumer debt to help pay for increased living costs. At what point does debt become so overwhelming that bankruptcy becomes a debt relief option?

Here are some signs you may need to go bankrupt:

Your debt payments take up too much of your take-home pay
You can’t meet even the minimum payments on your debts
You have missed or late payments, and these are beginning to impact your credit
You are receiving frequent calls or notices from collection agencies
You are afraid to open your mail because of outstanding bill payments
You have maxed out your credit cards and all other borrowing options
You are using high-cost loans, like payday loans, to keep up with other loan payments
Creditors have threatened legal action, including a wage garnishment or repossession of your vehicle.

These are common signs that you may be insolvent, meaning you can’t repay your bills as they come due.

Often, the decision to file personal bankruptcy is triggered by a catastrophic life event—job loss, divorce, separation, or illness—that makes a bad financial situation worse.

Regardless of the reason, if you’re facing overwhelming debt, it’s crucial to assess your situation and consider all available options, including bankruptcy, if necessary.

Should You Declare Bankruptcy?

If your credit card balances, personal loans, and other unsecured debts have grown to the point that you can’t realistically repay them, bankruptcy might be a solution.

Bankruptcy provides an automatic stay. When you file bankruptcy, your creditors are notified, and all actions against you stop. This includes lawsuits, wage garnishments and collection calls and letters.

Bankruptcy clears unsecured debts. Most unsecured debts, including credit card debt, payday loans, tax debts, lines of credit, and unpaid bills, can be eliminated through bankruptcy.

Bankruptcy can help balance your budget. By eliminating problem debt, your monthly payments are much lower, helping you get a fresh start.

While bankruptcy can offer relief from certain debts, it’s not a cure-all solution. There are important limitations and situations where other options may make more sense.

Bankruptcy does not get rid of all types of debts. If most of your debts are not dischargeable in bankruptcy (like student loans less than 7 years old, alimony or child support) or are secured debts (like a mortgage or car loan), bankruptcy won’t help.

Bankruptcy can be expensive. If you have a good income, you must make surplus income payments. You may lose non-exempt assets when you file bankruptcy. Having said that, bankruptcy does not mean you lose everything. Every province in Canada has a list of bankruptcy exemptions listing assets you keep including most personal belongings and a vehicle worth up to a certain value.

Credit counselling: Your trustee will provide two free credit counselling sessions as part of your bankruptcy. These sessions will teach you how to repair your credit, manage your budget and make better borrowing decisions to help you avoid debt problems going forward.

When Is the Best Time to File Bankruptcy? Key Factors

Here are some additional factors that can have an influence on when to file bankruptcy.

Tax Refunds

When you declare bankruptcy in the calendar year can mean the difference between losing only one year’s tax refund or losing multiple refunds. When you file bankruptcy, you lose your tax refund for the year of filing and any unfiled previous years. Filing early in the year (January or February) could mean losing two years of refunds since you likely haven’t filed the previous year’s taxes yet. A better strategy might be waiting until after filing your tax return and receiving your refund, or filing late in the calendar year to minimize lost refunds.

Creditor Actions

If your wages are being garnished or creditors are threatening legal action, immediate filing might be necessary to stop these collections. However, you should weight the cost of losing your tax refund against the cost of a potential wage garnishment or the emotional impact of continuing phone calls.

Preferential Transactions

Bankruptcy law can set aside the transfer of property or assignment of security during a certain window prior to bankruptcy.

If you’ve recently sold, transferred, disposed of assets, borrowed money or made big payments to certain creditors, the timing of your bankruptcy could matter as the trustee must review these types of transactions made in the months before bankruptcy. If you think any of these types of transactions might apply to you, be sure to discuss them with your trustee before making any decisions about the timing of when to file or whether other options to deal with your debts may be more appropriate.

Employment Issues

Bankruptcy generally does not affect your current employment unless you are bonded or hold certain professional designations.

If you’re currently unemployed with limited income, waiting until you secure new employment might make sense unless creditor actions demand immediate response.

Second Bankruptcy

Filing for a second bankruptcy in Canada has more severe consequences, including a longer discharge period (typically 24 to 36 months instead of 9) and the bankruptcy remaining on your credit report for 14 years instead of 6 or 7. A consumer proposal is often a better option than a repeat bankruptcy.

Joint Debts

Joint debts complicate matters in bankruptcy, as bankruptcy doesn’t eliminate the other person’s responsibility for the debt, potentially leaving your co-signer or joint account holder solely responsible for the full amount owed. Whether you file bankruptcy before or after divorce can also affect that distribution of assets to your ex-spouse versus your creditors.

Immigration and Sponsorship

When you’re sponsoring someone, you’re essentially taking on a financial responsibility and commitment to the person you’re trying to sponsor to come into Canada. That means there are complications when in comes to bankruptcy and sponsorship. You cannot sponsor someone while undischarged from bankruptcy. However, a consumer proposal might offer an alternative that allows you to address your debt while maintaining your ability to sponsor. Planning your debt resolution strategy around immigration goals requires careful consideration of timing and available options.

What Do Bankruptcies Do to Your Credit?

You may be delaying contacting a Licensed Insolvency because you fear the impact of bankruptcy on your credit rating.

When you declare bankruptcy in Canada, it becomes a part of your credit history. Your credit report will show the date you filed for bankruptcy, the date of discharge, and the debts included in the bankruptcy. Equifax and TransUnion will keep a record of your bankruptcy for 6 years from the date of your bankruptcy discharge.

Filing bankruptcy will lower your credit score, affecting your ability to obtain credit in the future.

While the impact of bankruptcy on your credit report is significant, it’s not permanent. Here are some steps you can take to rebuild your credit after bankruptcy:

Apply for a secured credit card. These cards require a cash deposit and are easier to get if you have damaged credit, including bankruptcy. Use it responsibly to demonstrate good credit habits.
Make all payments on time. Consistently paying bills on time is crucial for rebuilding credit.
Keep credit utilization low. Use no more than 30-35% of your available credit limit. This shows lenders that you are not overly reliant on credit.
As your credit score improves, apply for an unsecured credit card but follow the same good credit management practices.
Monitor your credit report. Regularly check your credit report for errors and dispute any inaccuracies immediately.

Is Bankruptcy Your Only Option?

It’s best to avoid declaring bankruptcy if possible – it should only be used as a last resort. Before you decide, discuss other debt solution options with a Licensed Insolvency Trustee (LIT).

The alternatives:

Consolidation Loan: This involves taking out a new loan to pay off multiple debts, potentially at a lower interest rate. A debt consolidation loan can work if you have good credit, good cash flow, and potential assets to use as collateral, such as equity in your home.
Credit Counselling: Working with a credit counsellor can help you develop a budget and debt repayment plan. A debt management plan is a good option if you can repay all your debts.
Consumer Proposal: This is a legally binding agreement where you offer to pay creditors a percentage of what you owe. It is a good alternative to bankruptcy that still protects you from creditor actions. A consumer proposal has less of an impact on your credit score than bankruptcy.

When To Consult a Licensed Insolvency Trustee

The best time to speak with a Licensed Insolvency Trustee is before your financial situation becomes critical. Early consultation helps you understand all available options and their timing implications. A trustee can assess your situation objectively and explain how different timing scenarios might affect your outcome.

You may hesitate to seek help, fearing you’ll be pressured into filing for bankruptcy immediately. We believe that filing for bankruptcy should be a considered decision, not a rushed process. We want you to consider your options carefully, understand the bankruptcy process and ensure you are comfortable with your decision.

Deciding when to declare bankruptcy is a complex and personal decision. While bankruptcy can provide a fresh start for those overwhelmed by debt, it’s not the best solution for everyone.

Contact us today to discuss the solutions available to help you regain control of your finances and work towards a debt-free future.

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When to Declare Bankruptcy in Canada