Is Filing for Bankruptcy My Best Option?
Many Canadians who have a serious debt problem consider filing for bankruptcy, and some even think that it is their only way to get out of debt. But it is also important to consider “When is Filing Bankruptcy Not Right For Me?”
There are many different circumstances in which a Licensed Insolvency Trustee (formerly a bankruptcy trustee) may not recommend that you go bankrupt. A LIT (Licensed Insolvency Trustee) provides a full range of financial solutions to debt problems such as credit counselling, debt management, budgeting tips, and filing a consumer proposal.
A LIT will only recommend filing for bankruptcy as a last resort, and we will help you explore your options if bankruptcy is not the right solution for your situation.
Bankruptcy is a big decision, so before you decide to file bankruptcy you should explore any possible alternatives that could work for your budget and income.
If you do not carefully consider all of the options and how filing bankruptcy could impact your future and your life, you could end up making the wrong decision for dealing with your debt.
Making the wrong decision on dealing with your debt can cause you to stay in debt longer and will cost you hundreds of dollars in interest charges.
What is Bankruptcy?
Bankruptcy is a serious legal process that gives debt relief to consumers who have debts that they are unable to repay their creditors. Bankrupts are honest but unfortunate consumers who have found themselves in unfortunate circumstances; most bankruptcies are caused by a job loss, illness that keeps a person from work, or a divorce / separation.
Regardless of the reasons you are considering bankruptcy, the process of filing bankruptcy can have a long-term impact on your credit and personal life.
Even a LIT (formerly a bankruptcy trustee) will recommend going bankrupt as a last resort.
If you are wondering “is bankruptcy the right choice for me?” you should schedule a free evaluation with a Licensed Trustee who can help you examine all of your options, and answer your questions.
The Trustee will help you determine if bankruptcy is the right course of action for you. You can always trust the advice of the Trustee, as all Trustees in Canada must follow a strict code of professional ethics.
In this article a Licensed Insolvency Trustee will examine certain issues surrounding bankruptcy such as the cost of going bankrupt, alternatives to bankruptcy, debts that are and are not eliminated in bankruptcy as well as how bankruptcy impacts joint debts you have.
What are the Reasons Bankruptcy Might not be Right for me?
Most of your debts are secured debts – Secured debts are not included in bankruptcy.
A secured debt is a debt that has collateral or an asset behind it that “secures” the debt. Examples of secured debts include your mortgage and a car loan. Your credit card debt, for example, is not tied to any specific asset and is not secured by an asset so it is considered “unsecured debt.”
Not all types of debt can be included in bankruptcy, and one of the few types of debt that cannot be eliminated by going bankrupt is secured debt.
Therefore, if you have lots of secured debt but very little unsecured debt you should not consider bankruptcy. You might not get the results you are looking for by filing bankruptcy if you do not have a large amount of unsecured debt. If you do go bankrupt and you have lots of secured debt, you will lose your assets unless the equity is protected by the bankruptcy exemptions in your province.
Other types of debt that is not eliminated by bankruptcy include court ordered payments, child support, alimony payments and student loan debt that is less than 7 years old. If you have a large amount of these debts, filing for bankruptcy is not likely the right decision for you. A Licensed Insolvency Trustee will help you explore other solutions for your debt problems if you have a large amount of debt that is not eligible to be discharged in bankruptcy.
You Have Co-Signers on Your Loans / Debt – Joint Debt & Bankruptcy
If you have any loans that are co-signed you will have to speak with all of your co-signers before you decide to go bankrupt. The reason for this is that your co-signers will be responsible for paying the loan if you go bankrupt and your bankruptcy will impact their credit report and finances.
A co-signer agrees to take on the responsibility for the loan if the main borrower cannot keep up the payments, and if your co-signer does not have the means to take on this responsibility because of your bankruptcy, then you filing for bankruptcy will also hurt your co-signers credit rating by declaring bankruptcy.
This is a serious matter to consider, and if you have co-signers on debts you would like to include in bankruptcy you must speak with them honestly about your money problems. It might be that your co-signer would want to consider bankruptcy as well, or they might be able to take on the responsibility of paying your loan in full, but you must discuss with them that you are considering filing bankruptcy.
You Cannot Afford to Go Bankrupt Because of the Fees and Costs
This generally applies for people that would have significant “surplus income” payments when going bankrupt, as the cost of a basic bankruptcy is only $200 a month, which is the only payment you will have to make – you won’t be making any payments on your unsecured debt during bankruptcy. If you cannot afford to pay the $200 minimum (there is no way to get this lowered or waived as it is a government set fee) monthly fee for bankruptcy, you are likely judgement proof, which means that you do need to go bankrupt in order to get relief from creditor harassment for collection on your debts.
However, for debtors with significant surplus income payments – a requirement to pay more if your monthly income is over a limit set by the government based on your family size – the cost of bankruptcy can become too high to fit their debt repayment plans.
Surplus Income Requirements
If you are a debtor with surplus income requirements in your bankruptcy, you will have to pay 50% of your income over the limit to your creditors. The limit for a family of 3 is $3,197 a month, which means that if your income is $6,000 per month, you will have to pay 50% of the surplus to your bankruptcy case for distribution to your creditors. In this case, you would have to pay $1,401.50 a month in surplus income payments to your LIT (Licensed Insolvency Trustee, formerly a bankruptcy trustee) as this would be 50% of your surplus income of $2,803 (the amount your $6,000 income is over the limit of $3,197 for a family of 3 members).
Not only will you have to pay more, you will also have your bankruptcy extended by 12 months if you have surplus income requirements. The cost of filing bankruptcy can be quite significant if you have a large income. In this case, the Trustee will recommend that you file a consumer proposal, which will allow you to restructure your debt payments, pay little to no interest, and pay only 30% to 50% of your total debt amount.
Another cost of bankruptcy is the assets and belongings that you will have to surrender to your Trustee. Assets such as your car, home, cash on hand and in your bank account, and inheritances that you should receive while you are in bankruptcy; if your inheritance is triggered after you receive your discharge, you are free to keep all of your inheritance proceeds.
Most bankrupts will have all of their assets protected by bankruptcy exemptions – which is a list of assets a debtor going bankrupt can keep – although if you have assets not protected by the exemptions, which vary from province to province, bankruptcy won’t be the correct decision for you.
Bankruptcy Alternatives Offer You Other Options –
Bankruptcy might be the best solution for you if your financial situation warrants it. However, many debtors do not know that there are many bankruptcy alternatives that could be available to them. Bankruptcy might not be your only way out of your money problems.
Bankruptcy alternatives could include:
- Filing a consumer proposal;
- Getting a debt consolidation loan;
- Entering into a debt management program;
- Better budgeting / Cutting expenses;
- Increasing your income by getting a second job.
The most popular bankruptcy alternative is a consumer proposal. A consumer proposal is a legal agreement that allows you to consolidate your debt into one payment to your consumer proposal administrator (a Licensed Insolvency Trustee) and allows you to repay only a portion of your debt without interest charges.
A proposal allows you to keep any assets that would be lost in bankruptcy and has many other advantages for a debtor with enough of an income stream to qualify for a consumer proposal. The main qualification to have your proposal accepted by your creditors is that it must offer your creditors more than they would receive if you were to go bankrupt.
One of our Bankruptcy Canada consumer proposal administrators can help you draft a proposal that has the highest chance of being accepted by your creditors. Only a LIT (Licensed Insolvency Trustee) can submit a consumer proposal to your creditors.
Your Financial Challenges are Minor –
While anyone who owes over $1,000 is eligible to go bankrupt, the financial consequences and impact on your credit score, means you should not go bankrupt unless your debt problem is serious. Unless your debts are overwhelming and you are unable to repay your debt through all other methods, you should avoid bankruptcy.
Your Money Problems are Temporary –
Many people have financial challenges at certain times during their life. Some of these financial challenges lead to bankruptcy or another debt relief solution that requires professional help, although many other money problems are only temporary. If you have a temporary loss of income, or you are expecting an increase of income or another improvement of your financial situation in the near future and you can wait until that time you should not file bankruptcy.
If you are facing a debt problem that is temporary you should ask yourself if you feel the situation is temporary. Do you think you will receive a pay increase at work? Will you be able to get overtime, more hours, or a second job to increase your income to get your debt problem under control? Are you expecting an inheritance in the near future? If you can wait out a temporary debt problem this is likely your best solution. Bankruptcy and other bankruptcy alternatives (such as a consumer proposal or a debt management plan) are powerful tools for people with an overwhelming debt problem, although they are not always the best solution for people with minor and/or temporary debt problems.
How Can I Decide if Bankruptcy is a Good Option for Solving My Debt Problem?
To learn if declaring bankruptcy is the right debt solution for your money problems you can schedule a free evaluation with a licensed insolvency trustee. During this hour long free and confidential evaluation you can discuss your debts. The Trustee will help you learn about bankruptcy and answer your questions. This will help you decide if bankruptcy is right for you. You can ask any questions you would like. The Trustee might also be able to provide a bankruptcy alternative. The most popular alternative is a consumer proposal, although a Trustee can provide many other forms of debt relief as well.
Bankruptcy might be your only way out of debt but you shouldn’t make any decisions without getting free professional advice. Start on the road to getting out of debt now by scheduling an evaluation with a Trustee to learn whether filing bankruptcy is right for you or not. You’ll feel better and end the stress if you have a full understanding of your debt situation and all options that match your debt, income and budget.