Understanding Bankruptcy: A Guide on How Bankruptcies Work in Canada
Bankruptcy is often perceived as a life-altering event signifying financial failure. However, it’s crucial to understand that bankruptcy can be a lifeline for those drowning in debt. It offers a chance to wipe the slate clean and start anew. In this comprehensive guide, we will explore how bankruptcies work in Canada, guiding you through the intricate bankruptcy process in Canada.
Defining Bankruptcy
Bankruptcy is a legal procedure that aims to provide relief to individuals unable to repay their debts. It typically involves surrendering your assets to a Licensed Insolvency Trustee (LIT) who then liquidates these to pay off your creditors.
The Role of a Licensed Insolvency Trustee
A Licensed Insolvency Trustee (LIT) is a federally regulated professional who provides advice and services to individuals and businesses with financial difficulties. They are the only professionals legally authorized to administer the bankruptcy process in Canada.
Launching Bankruptcy Proceedings
Commencing bankruptcy proceedings involves meeting with your LIT and completing the necessary paperwork. This paperwork details your income, assets, and debts. Once the documents are signed, your LIT electronically transmits your bankruptcy information to the Office of the Superintendent of Bankruptcy in Ottawa.
Within five days, your LIT sends a copy of your bankruptcy paperwork to each of your creditors. From this point, your creditors are legally obliged to halt any collection efforts against you.
Debts and Assets in Bankruptcy: What Happens?
During bankruptcy, most of your assets are surrendered to your LIT, who then liquidates them to repay your debts. However, each province in Canada has a set of bankruptcy exemptions. These exemptions are assets you can retain during bankruptcy. The specifics vary by province, but they generally include necessary items like clothing, furniture, medical aids, work tools, and some amounts of pensions or registered retirement savings.
As for your debts, bankruptcy primarily tackles your unsecured debts. These typically include credit cards, personal loans, and medical bills. Secured debts, such as mortgages and car loans, are not eliminated by bankruptcy but may be restructured.
Certain types of debt cannot be discharged in bankruptcy, including:
- Court-ordered fines;
- Debt incurred through fraud;
- Alimony or child support payments;
- Debt for damages related to intentional harm or wrongful death;
- Student loans, if bankruptcy occurs within seven years of finishing your studies.
Bankruptcy Costs
The cost of declaring bankruptcy in Canada is regulated by the federal government. The minimum cost is usually around $1,800, covering administrative costs. However, individuals with a steady income may have to make additional “surplus income” payments.
The Bankruptcy Timeline
For first-time bankruptcy filers with no surplus income, bankruptcy lasts approximately nine months. However, if you have surplus income or have previously declared bankruptcy, your bankruptcy duration may be extended to 21 months or longer.
The Discharge from Bankruptcy
Obtaining a discharge from bankruptcy is the final step in the process. It signifies the official cancellation of your debts and the end of your bankruptcy. However, achieving this requires fulfilling certain duties, including:
- Attending credit counselling sessions;
- Sending proof of your income to your LIT each month;
- Making monthly payments to your LIT if you have surplus income;
- Attending a meeting of your creditors if requested.
Life After Bankruptcy
Once discharged, you are no longer liable for your discharged debts. However, a note of your bankruptcy will remain on your credit report for up to seven years. Rebuilding your credit will require consistent effort, but with careful financial management, it is entirely possible.
In closing, bankruptcy is a significant financial decision with long-lasting implications. However, it can also be a lifeline for those overwhelmed by debts. Understanding how bankruptcies work and the bankruptcy process in Canada can help you make informed decisions about your financial future.
Reach Out for Help
If you’re considering bankruptcy or need help understanding your financial situation, don’t hesitate to seek professional advice. Reach out to a Licensed Insolvency Trustee or a credit counsellor to discuss your options. They can help you evaluate if declaring bankruptcy is the right choice for you.
Remember, bankruptcy is not the only solution to debt problems. Alternatives such as debt management programs, debt consolidation, debt settlement, or consumer proposals may also be viable options. Be sure to explore all avenues before making a decision.
Rebuilding After Bankruptcy
After your bankruptcy has been discharged, it’s time to start rebuilding. This might seem daunting, but it’s entirely achievable with careful planning and diligence.
Start by establishing a realistic budget and sticking to it. Pay all your bills on time, and aim to save a portion of your income each month. You could consider applying for a secured credit card or small loan to help rebuild your credit.
Remember, the goal is not just to rebuild your credit, but to establish healthy financial habits that will prevent future debt problems.
Bankruptcy is a complex process and a major financial decision. Fully understanding how bankruptcies work and the bankruptcy process in Canada is vital before making such a decision. Always seek professional advice and consider all available options. Bankruptcy might be a way to start anew, but it’s not the only path to financial freedom.
