10 things you need to know about bankruptcy in Canada

Deciphering Bankruptcy in Canada: 10 Crucial Insights

Are you grappling with an overwhelming debt load? Failing to keep up with your debt payments? Unable to meet all or part of your monthly bills? These are all red flags indicating that it’s time to explore your debt relief alternatives.

1. Instant Relief from Unsecured Debts through Bankruptcy

Under the Bankruptcy and Insolvency Act, there are two legal options for debt forgiveness: bankruptcy and consumer proposal. If your debt payments become unmanageable or your debt surpasses your income, bankruptcy can offer immediate relief from most, if not all, of your unsecured debts. These include tax debt, credit card debt, lines of credit, and payday loans. Declaring bankruptcy in Canada also offers immediate legal protection. Creditors and debt collectors can no longer reach out to you, and you are shielded from any legal actions such as wage garnishments.

2. Role of a Licensed Insolvency Trustee in Bankruptcy

A Licensed Insolvency Trustee (LIT) is the only financial professional authorized to file a bankruptcy or a consumer proposal on your behalf. They are licensed by the Office of the Superintendent of Bankruptcy Canada (OSB) and adhere to a strict Code of Ethics. The federal government regulates their fees. They must work transparently to support you and your creditors impartially. It’s their responsibility to be honest with you about your debt relief options.

3. You Don’t Lose Everything in Bankruptcy

Each province has a list of exempt assets that cannot be seized when you declare bankruptcy. Exemptions can include food and fuel, clothing, furnishings, appliances, medical aids, a car, your home, and necessary work tools. Some exemptions come with a dollar limit, while others don’t.

4. House Exemption in Certain Situations

The fear of losing their home in bankruptcy is common among people. The provincial exemptions and the amount of equity in your home can impact your situation. The equity is determined by the valuation of your home and how much you still owe (including any outstanding property taxes). Sometimes, you might need to use your home’s equity to pay your debts, which lets you keep your house. An LIT can guide you on what’s possible or required in your situation.

5. The Cost of Declaring Bankruptcy

Declaring bankruptcy entails administrative costs for having an LIT manage your process. If you have to make surplus income payments, you’ll also make a monthly payment towards repaying some of your debts. Your LIT will explain all these costs and the process of making monthly payments. The costs are significantly less than what you’d be paying before declaring bankruptcy and having to pay your debts in full.

6. Bankruptcy’s Impact on Spouse or Partner

Your bankruptcy filing only impacts your partner if it includes debts you’ve both co-signed on. In such cases, your partner is responsible for those debts, even if you have filed for bankruptcy. If co-signed loans are too heavy for your partner to handle, discuss with an LIT about debt relief options like a consumer proposal, debt consolidation, or, in extreme situations, bankruptcy.

7. Responsibilities Under Bankruptcy Filing

When you file for bankruptcy, you must complete certain obligations and duties before you can be discharged. You have to surrender non-exempt assets to pay your creditors some of what you owe. Your LIT will review your assets and help you understand what’s exempt in your province and what’s not.

You’ll also make monthly payments based on your income and expense reports. This money covers your LIT’s administrative costs and fees and is used to pay back some of your debts if you have surplus income. You have to attend two credit counselling sessions with your LIT or a credit counsellor. They will help you manage your finances and rebuild your credit during and after the bankruptcy process. You must also provide your LIT with the necessary information to file tax returns on your behalf.

8. Duration of Bankruptcy Process

A first-time bankruptcy can be discharged as quickly as nine months. However, the duration can vary based on your specific situation. If you have surplus income or have previously filed bankruptcy, the process can extend up to 36 months.

9. Impact of Bankruptcy on Credit Rating

Filing for bankruptcy automatically includes it on your credit report with an R9 credit rating. This rating remains on your report for six years after you’ve been discharged from bankruptcy. However, rebuilding your credit is possible, and you can start working on it immediately with the assistance of an LIT. They will guide you on how to apply for credit gradually and make strategic purchases and payments to build a positive credit history.

10. Alternative Debt Solutions

A consumer proposal is a popular alternative to bankruptcy for those who can repay a portion of their debt and want to keep their assets. It’s a negotiated agreement between you and your creditors that typically results in you repaying a portion of what you owe for up to five years with no interest accumulating. A consumer proposal affects your credit rating, but not to the same extent as bankruptcy.

Overwhelming debt can be a heavy burden. But remember, a free initial consultation with a Licensed Insolvency Trustee can help you understand the various solutions available to you. Never avoid your financial problems out of fear of filing for bankruptcy. The sooner you seek help, the faster you’ll be on your path to a debt-free life.

If you’re unsure about whether bankruptcy is the right debt solution for you, schedule a no-obligation meeting with a Licensed Insolvency Trustee.

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