What are the Effects of Filing Bankruptcy?

Speak to a Licensed Insolvency Trustee About Filing Bankruptcy & How it Affects You

If you find yourself drowning in debt, you may be considering filing for bankruptcy as a potential solution. Bankruptcy can provide individuals with overwhelming debts the opportunity for a fresh financial start by eliminating debt, stopping collection calls, and ending wage garnishment orders. However, it’s essential to understand the effects, both positive and negative, of filing for bankruptcy in order to make an informed decision. In this comprehensive guide, we will address the most commonly asked questions and concerns about bankruptcy and delve into its pros and cons.

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Pros of Filing Bankruptcy

Filing for bankruptcy offers several advantages that can help individuals regain control of their finances. Here are some of the key benefits:

Debt Elimination

One of the most significant advantages of filing for bankruptcy is the elimination of debt. Bankruptcy allows you to discharge certain debts, relieving you of the responsibility to repay them. However, it’s crucial to understand that not all debts can be eliminated through bankruptcy. Before declaring bankruptcy, it’s important to identify which of your debts will be absolved.

Collection Calls and Wage Garnishment

Another positive effect of filing for bankruptcy is that it puts an end to collection calls and wage garnishment. Once you file for bankruptcy, an automatic stay is put in place, preventing creditors from pursuing further collection activities or garnishing your wages. This can provide much-needed relief and allow you to focus on rebuilding your financial future.

Cons of Filing Bankruptcy

While filing for bankruptcy can offer significant benefits, it’s also important to consider the potential drawbacks. Here are some of the cons of bankruptcy:

Loss of Assets

One concern individuals often have when considering bankruptcy is the fear of losing their assets. While it’s true that you may need to surrender certain assets, bankruptcy law allows for exemptions that protect many of your personal and household belongings, as well as tools used to earn a living. Under Ontario law, for example, you can keep unlimited clothing, a motor vehicle up to $7,117 in value, furnishings and appliances worth up to $14,180, and tools of the trade valued at $14,405. It’s important to consult with a licensed insolvency trustee to determine which assets are exempt and which may need to be surrendered.

Impact on Credit Score

Filing for bankruptcy can have a significant impact on your credit score. Once you file for bankruptcy, it will be noted on your credit report for a period of six years after discharge. This can make it more challenging to obtain future credit and may result in higher interest rates on any credit you are able to obtain. However, it’s important to note that there are ways to rebuild your credit after bankruptcy, and with time and responsible financial management, you can improve your creditworthiness.

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What Happens to Assets in Bankruptcy?

One of the most common questions individuals have when considering bankruptcy is what will happen to their assets. The answer to this question depends on various factors, including the specific bankruptcy laws in your jurisdiction and the amount of equity you have in your assets. Here’s an overview of how assets are typically treated in bankruptcy:

Surrendering Assets to a Licensed Insolvency Trustee

Once you file for bankruptcy, bankruptcy law requires you to surrender your assets to a Licensed Insolvency Trustee. These assets will then be sold, and the proceeds will be distributed among your creditors. However, it’s important to note that you don’t lose everything. There are exemptions in place that protect certain assets from seizure. In Ontario, for example, exemptions include most personal and household belongings, tools used to earn a living, and protection for home equity up to a certain threshold.

Determining Exempt Assets

To determine which assets are exempt, the trustee will ask you to create a list of all items in your house and assign a fair value to each item. Fair value refers to the amount you would receive if you were to sell the item at a garage sale. This helps the trustee differentiate between exempt and non-exempt assets. In most cases, individuals are able to keep all of their assets in bankruptcy. However, if you have property valued above the exemption limits, alternatives to bankruptcy, such as a consumer proposal, may need to be considered.

Will Bankruptcy Affect My Home?

The impact of bankruptcy on your home depends on various factors, including the amount of equity you have in your home. Here’s what you need to know:

Significant Equity in Your Home

If you have significant equity in your home, filing for bankruptcy may have implications. In some cases, the trustee may need to sell your home to repay your creditors. However, it’s important to consult with a licensed insolvency trustee to understand the specific implications for your individual circumstances.

Limited Equity in Your Home

If you don’t have significant equity in your home, filing for bankruptcy should not affect your house. Bankruptcy exemptions and protections may allow you to retain ownership of your home, especially if your home equity falls below a certain threshold.

Will Bankruptcy Affect My Car?

In most cases, filing for bankruptcy will not result in the loss of your car. Here’s what you need to know:

Leased or Fully Secured Car

If your car is leased or fully secured by a car loan, you can typically continue making your monthly payments and retain possession of the vehicle. The trustee will review your specific situation to determine the best course of action.

Owned or Partially Paid Car

If you own your car outright or it is mostly paid off, Ontario legislation allows you to keep up to one vehicle worth up to $6,600. Even if your car is worth more than that, there may still be alternatives available. Consult with a licensed insolvency trustee to understand the options specific to your situation.

How Does Bankruptcy Affect My Credit Rating?

Filing for bankruptcy will have a significant impact on your credit rating. Here’s what you need to know:

Notation on Credit Report

Once you file for bankruptcy, the Office of the Superintendent of Bankruptcy will notify the credit bureaus, and the bankruptcy will be noted on your credit report. This notation will remain on your report for six years after discharge. For individuals who have filed for bankruptcy a second time, the notation may remain for a period of 14 years.

High-Risk Status

Having a bankruptcy notation on your credit report signals to lenders that you are a high-risk borrower. As a result, obtaining future credit may be more challenging, and you may face higher interest rates on any credit you are able to obtain. However, it’s important to remember that rebuilding your credit is possible, and with time and responsible financial management, you can improve your creditworthiness.

How Does Bankruptcy Affect My Spouse?

The impact of bankruptcy on your spouse depends on several factors. Here’s what you need to know:

Solely Owned Debts

If all of your debts are solely yours, filing for bankruptcy should not have a direct effect on your spouse or their credit rating. However, it’s important to note that there may be unique circumstances that could impact your spouse. It’s crucial to fully understand how bankruptcy affects your spouse before making a decision.

How to File for Bankruptcy in Canada

Filing for bankruptcy in Canada can only be done through a Licensed Insolvency Trustee. Here’s a general overview of the process:

  1. Book a consultation with a trustee to discuss your debts, assets, and budget.
  2. Review the costs and benefits of filing for bankruptcy compared to other debt management options.
  3. Complete the necessary forms and provide the trustee with all required documentation.
  4. The trustee will file the forms with the government, initiating the bankruptcy process.
  5. Creditor protection begins, and collection activities are halted.
  6. Work with the trustee to fulfill your obligations during bankruptcy.

It’s important to note that filing for bankruptcy is not without short-term and long-term effects. Consulting with a licensed insolvency trustee is crucial to fully understand the implications of bankruptcy and explore alternative debt management options.

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Conclusion

If you are considering filing for bankruptcy, it’s crucial to weigh the effects, both positive and negative, before making a decision. While bankruptcy can provide a fresh start by eliminating debt and stopping collection activities, it’s important to consider the potential loss of assets and the impact on your credit rating. Consulting with a licensed insolvency trustee will help you navigate the complexities of bankruptcy and explore other options that may be better suited to your financial situation. Remember, there is no one-size-fits-all solution, and seeking professional advice is key to making an informed decision about your debt management journey.

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I was feeling overwhelmed by my credit debt, constantly receiving calls and letters from debt collectors, which caused a great deal of stress. It seemed like there was no way out of this situation. However, I discovered Bankruptcy Canada while listening to my local talk radio station. This organization proved to be friendly, empathetic, knowledgeable, and professional, with extensive experience in their field.

During our initial meeting, they took the time to understand my debt and financial circumstances. They explained the various options available to me and helped create a personalized plan that would be most beneficial for my situation. With their assistance, I was able to avoid declaring bankruptcy by presenting a consumer proposal to my creditors. Fortunately, my proposal was accepted, and I am extremely relieved to finally be free of debt, all thanks to BankruptcyCanada. The burden on my shoulders feels significantly lighter now, and I truly believe that Bankruptcy Canada has the most skilled specialists in debt relief.

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Toronto

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