Filing Bankruptcy or a Consumer Proposal on a Disability Income
Living on a disability income due to long-term injury or illness can be financially challenging. The constant worry of debt piling up can be nerve-wracking and often leads to the question: Can I File for Bankruptcy or a Consumer Proposal if I am on a Disability Income?
Let’s delve into this question and explore the different perspectives and options available for those living on disability income.
The Debt Conundrum: Secured Vs Unsecured Debt
One of the first questions that arise when considering bankruptcy is what happens if you don’t pay back your creditors? The answer to this depends on the type of debt you have.
Debts can be classified into two categories: Secured and Unsecured debts.
Secured debts are those that are backed by collateral like your house or car. In case of non-payment, your creditor may seize the collateral.
Unsecured debts, like credit card balances or personal loans, are not backed by any collateral. In such cases, the creditors can take legal action to recover the owed amount, including filing a lawsuit to garnish your wages.
However, it’s important to note that if you’re on long-term disability and not currently working, unsecured creditors cannot garnish your wages.
Disability Income and Debt Management
If your only source of income is a disability assistance program, creditors cannot garnish these payments. However, living on long-term disability income can still lead to financial stress due to increasing debt.
Many individuals on long-term disability seek assistance to manage their unmanageable debt. They aim to put an end to debt collection calls and prevent themselves from sinking further into debt. This often leads them to consider filing for bankruptcy.
Bankruptcy: A Viable Option?
Bankruptcy is often seen as a way out for those who cannot repay their debts. It offers a legal protection against creditors. Once you file for bankruptcy, unsecured creditors are required to stop all actions to recover the debt you owe. This gives you the breathing space to reorganize your finances.
However, it’s important to understand the implications of filing for bankruptcy:
- Your assets may be seized to repay a part of your non-exempt debts according to provincial bankruptcy rules.
- You need to make a monthly contribution during the bankruptcy period (minimum 9 months) to repay your creditors.
- You will lose tax returns and sales tax credits during the bankruptcy period, which could include your Disability Tax Credit.
- Any financial windfalls gained after filing for bankruptcy (like inheritance or lottery winnings) would be used to repay your creditors.
Disability Savings and Bankruptcy
If you have Registered Disability Savings Plans (RDSPs), you might be wondering if you can keep them in case of bankruptcy. RDSPs are designed to cater to the long-term financial needs of people with disabilities.
The Bankruptcy and Insolvency Act (BIA) does not directly address RDSPs in case of bankruptcy. However, a recent ruling in the BC Supreme Court prevented a Licensed Insolvency Trustee (LIT) from seizing RDSP funds in a case where the RDSP beneficiary declared bankruptcy. The future of RDSP funds in bankruptcy cases would depend on court discretion.
Bankruptcy and Future Disability Benefits
Another common concern is whether bankruptcy would affect your eligibility for future disability benefits. The answer, in simple terms, is no. If you were eligible before filing for bankruptcy, you should be equally eligible after filing. Your eligibility for disability benefits is not affected by your bankruptcy filing.
Seeking Financial Help
If you’re on long-term disability and struggling with your finances, reaching out to a Licensed Insolvency Trustee (LIT) can be beneficial. Here’s how they can assist:
Budgeting and Financial Management: An LIT can help you manage your finances to avoid bankruptcy. They can assist in budgeting your disability income to sustain you during the period you’re unable to work.
Debt Counselling: If you’re already in debt, an LIT can guide you through the available debt relief options, from budgeting to bankruptcy. They are obligated to adhere to strict ethical regulations, ensuring their advice is in your best financial interest.
Bankruptcy Assistance: If you decide to file for bankruptcy, you will need the assistance of an LIT. They are the only professionals authorized by the Canadian government to assist individuals in filing for insolvency.
Final Thoughts
Being on long-term disability and dealing with debt can be challenging. However, bankruptcy or a consumer proposal might be a possible solution. Remember, every situation is unique, and it’s crucial to seek professional advice to understand the best course of action for you.
Remember, it’s entirely possible to file for bankruptcy or a consumer proposal if you’re on disability income. If you owe at least $1,000 and find it hard to manage your debts, you may be eligible to file for bankruptcy. Be sure to consult with a Licensed Insolvency Trustee for a comprehensive understanding of your options.
