Debt Relief Experts
Your debts are high, and the struggle keeps you up at night, so much so that you know you need to do something. Yet you’ve been delaying filing for bankruptcy because you’re nervous about the process or are afraid about how filing bankruptcy will affect you or your family. But should you be? While the thought of bankruptcy may seem daunting, choosing to delay filing for bankruptcy can worsen your financial situation and limit your options for debt relief.
Here are some potential costs of postponing personal bankruptcy in Canada and why talking to a Licensed Insolvency Trustee sooner rather than later is better.
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Rising Debt and Interest Costs
The longer you take to deal with problem debt, the more debt you accumulate.
Making only minimum payments on credit cards means you’re barely chipping away at the principal. Most of your payment goes towards interest, leaving you trapped in a cycle of debt. As interest grows, you continue paying for living costs with credit until you max out your cards, then turn to payday loans or high-interest installment debt.
Attempts at debt consolidation often fail when the underlying issue is too much debt. While consolidating multiple debts into a single loan might seem like a solution, if you can’t afford the monthly payment, you are simply postponing the inevitable while paying more interest.
Increased Creditor Actions
Missed payments can cause creditors to become more aggressive in their collection efforts. Collection calls increase, followed by a threat of lawsuits.
Legal action by creditors can lead to court judgments against you. Wage garnishments can be imposed, reducing your take-home pay and further straining your ability to pay for basic needs.
Secured creditors may take more drastic measures, such as initiating foreclosure on your home or repossessing your vehicle. While bankruptcy does not deal with secured debts, filing insolvency can improve your cash flow sufficiently to allow you to keep up with mortgage and car loan payments.
The Canada Revenue Agency (CRA) might even place a lien on your property or freeze your bank account for unpaid taxes.
Depletion of Assets
To keep creditors at bay, you might be tempted to liquidate assets.
For example:
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Cashing out RRSPs to pay off debts, not realizing these are often protected in bankruptcy.
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Selling personal property for debt repayment when such items might have been retained through a consumer proposal or bankruptcy.
This depletion of assets compromises your long-term financial stability and retirement plans.
Further Damage to Your Credit Score
While bankruptcy does impact your credit score, continuing to struggle with overwhelming debt can be even more detrimental in the long run. Missed payments, defaults, and maxed-out credit cards all contribute to a declining credit score.
Both bankruptcy and missed payments remain on your credit report for six years. Delaying filing bankruptcy means missing out on the chance to begin rebuilding your credit score sooner.
Delayed Financial Rebuilding
Bankruptcy, while a serious step, can be the beginning of your financial recovery. Delaying the bankruptcy process means postponing your fresh start, free from debt.
Furthermore, credit counselling sessions that form part of the bankruptcy allow you to learn better financial management skills to help you build a stronger financial future.
Carrying high-interest debt for longer means you continue to allocate much of your income to interest payments instead of future savings.
Postponing bankruptcy also means delaying your bankruptcy discharge, which is the point at which you’re legally released from your debts. For first-time bankrupts with no surplus income, an automatic discharge can occur in as little as 9 months. However, if you have surplus income (earnings above a threshold set by the government), your bankruptcy may last 21 months. Second-time bankrupts face longer periods: 24 months with no surplus income or 36 months with surplus income. By delaying the start of this process, you’re essentially extending the time you’ll spend encumbered by debt and postponing your financial fresh start.
The sooner you file, the sooner you can complete your bankruptcy and rebuild your financial life.
Prolonged Stress and Family Strain
The emotional toll of financial distress cannot be overstated. Constant worry about debt can lead to sleepless nights and chronic stress. This can result in strained relationships as financial pressures mount and decreased productivity at work, potentially jeopardizing your employment.
These factors create a negative feedback loop, making it even harder to address your financial situation effectively.
Reasons You Might Wait to File For Bankruptcy
While addressing debt problems promptly is often beneficial, there are legitimate circumstances where delaying bankruptcy filing might be necessary or advisable. Here are some situations to consider:
- Unfiled tax returns: If you suspect you have tax debts, you must file all tax returns before filing to confirm how much you owe. Conversely, if you expect a significant tax refund, you may want to wait until after you receive your refund rather than have it form an asset in your bankruptcy.
- Recent asset transfers: If you’ve recently transferred assets to a spouse or family member, delaying bankruptcy might be necessary. Trustees have the responsibility and power to reverse transfers made within a certain period before bankruptcy.
- Preferential payments to creditors: If you’ve recently paid off one creditor to the disadvantage of others, especially if it’s a family member or friend, this could be seen as a preferential payment. Trustees can reverse these transactions, so waiting until the preference period has passed might be advisable.
- Recent use of credit: While regular credit use up until you consider filing bankruptcy is generally acceptable, if you’ve made significant purchases on credit recently, especially luxury items, filing for bankruptcy immediately could be considered fraud.
- Anticipated increase in income: If you’re expecting an increase in income, such as a large commission or bonus, filing immediately could affect your surplus income payments in bankruptcy. It may be best to wait to file to determine the impact on the cost of your bankruptcy or consider a consumer proposal as an alternative.
- Potential inheritance: If you expect to receive an inheritance soon, it might be wise to delay filing. Any inheritance received during bankruptcy becomes part of the bankruptcy estate and could be used to pay creditors.
While these are valid reasons to consider delaying bankruptcy, it’s crucial to weigh them carefully against the potential consequences of continued financial distress. Each situation is unique, and what’s right for one person may not be right for another.
Financial difficulties can happen to anyone, and seeking help is a sign of responsibility, not failure. If you’re struggling with debt, don’t let fear or stigma prevent you from exploring your options. Contact Hoyes Michalos for a free, confidential consultation. Our experienced Licensed Insolvency Trustees can help you understand all available debt solutions, including alternatives to bankruptcy. Taking action today can be the first step towards a more secure financial future.
If your debts have become too much to handle and you know you need to take action to deal with your debt, book a free consultation with one of our local trustees sooner rather than later.
