Many people know they must file for bankruptcy or a proposal but keep putting it off, hoping for a change in circumstance or a miracle. It is important you conduct yourself properly concerning whom you pay and how you deal with your assets while you are deciding whether to file for bankruptcy. If you don’t, you may put yourself in a position where you have your bankruptcy discharge postponed or denied and you may face severe fines by the court.
Many people ask how they can protect their assets from being seized and sold in a bankruptcy or if it is all right to pay a relative, for example, instead of a credit card company.
The simple answer is you cannot protect assets from seizure or give preferred payments to relatives or anyone while on the verge of bankruptcy. Some people even consider “running up” their debt just before bankruptcy since it will be written off anyway. A word of advice: Don’t! Trustees in bankruptcy have extraordinary powers to recover preference payments and assets “sold” at below market value.
Your bankruptcy trustee also has the duty to report such activities to the court, where severe penalties are possible.
Your Attitude Before Going Bankrupt
The best way to look at an impending bankruptcy or proposal is that it is the law of the land and your right to get a fresh financial start by erasing most, if not all, your debt while retaining certain assets specified by your province or territory.
Accept this without guilt. At the same time, don’t cheat. Play by all the rules and your fresh financial start will come about smoothly, without stress and investigation, and without guilt.
What Bills to Pay First
Here are some tips on how to prioritize debts and protect yourself before you file for bankruptcy:
* Family necessities: Provide the basic essentials for your family, such as food, medicine, and utilities. Postpone non-essential purchases such as electronics, toys, a car, or new clothes;
* Child support and maintenance payments: These payments are not affected by bankruptcy and must be kept up to date. A bankruptcy does not stop any actions for collections on child support or maintenance fees. Alimony and maintenance are provable claims and will be paid as a preferred claim for amounts incurred in the year before bankruptcy;
* Secured Debt: House mortgage and car loan payments should be made if there is equity to protect;
* Income taxes: You are required by law to pay income taxes. If you are self-employed, you must pay the periodic payments required. Even if you don’t have enough money to pay your taxes in full, you should always file your tax returns on time;
* Unsecured debt: Unsecured debts include credit card bills, bank signature loans, and any loans without collateral. Although these payments are the lowest priority, their bill collectors are often the first to start harassing you to pay when payments get behind.
Get Legal Advice
If your assets are significant you should seek legal advice from an experienced insolvency lawyer. You can find an experienced insolvency lawyer here or by asking an accountant or lawyer you deal with.
Some “Don’ts” Before Filing Bankruptcy
* Don’t make significant purchases on credit prior to bankruptcy or a proposal;
* Don’t make significant payments or payments to creditors out of the ordinary course of your payment history. Many people want to pay a relative, for example, ahead of a credit card company. Don’t do this. The law doesn’t distinguish between types of creditors and can impose severe penalties if you do this;
* Don’t cash in RRSPs or stocks on the eve of a bankruptcy or a proposal;
* Don’t sell or transfer assets to a friend or family member;
* Don’t purposefully neglect to list some of your creditors; all debt must be listed on your bankruptcy forms.
Dealing With Awkward Situations
Let’s say your uncle John co-signed a loan for you. If you go bankrupt, the bank will look to your uncle for repayment of the loan, so you would prefer not to include this debt in your bankruptcy but to pay the debt yourself.
This is not allowed and if you attempt this and are caught, you risk severe penalties.
A better way to handle this situation is to explain the situation to your uncle. You many not make an agreement to repay him, but after you receive your discharge from bankruptcy you will be free to pay back him or any other creditor.
Work Related Credit Cards
When you file for bankruptcy, you are not allowed to keep any of your credit cards. So what do you do if you have to have a credit card for your job? There are several solutions:
* Have your spouse or a friend get a supplemental card for you. It will have your name on it but the responsibility for payment will be with the primary card holder;
* Buy a prepaid credit card;
* Use a debt card.
Remaining Self-Employed in an Incorporated Company
Let’s say you are self-employed. In conjunction with your small business you incorporated a company with yourself as the sole director. The business earns you the equivalent of wages and you know you can keep the business while in bankruptcy since there are no assets in the business.
However, you cannot be the director of a company while bankrupt. One solution is to have your spouse or a friend appointed as a director and you resign and become an employee of the business. This should be done just before the bankruptcy and the change in directors registered by a lawyer. Copies of the changes should be supplied to your trustee so that he or she knows everything is “above board.”
If you have any questions about protecting yourself before going bankrupt or other aspects of bankruptcy or consumer proposals you can set up a FREE consultation with our trustees, who are in every province and territory in Canada: or call Bankruptcy Canada directly: 1-877-879-4770.