Understanding the Financial Implications of Bankruptcy Filing
Dealing with insurmountable debts can lead to considering multiple debt relief options, including bankruptcy. But one might wonder, “how much does it cost to file bankruptcy?” This question is crucial before you make any decision. Here, we will navigate the financial implications of filing bankruptcy in Canada, considering various factors that determine the ultimate cost.
The Cost Spectrum of Bankruptcy
The cost of filing bankruptcy varies from person to person due to diverse factors such as income, family size, expenses, and assets. While it’s challenging to pin an exact figure without knowing individual circumstances, let’s delve into the components that contribute to the cost.
Constituents of Bankruptcy Cost
The cost of bankruptcy comprises three primary constituents:
- Monthly contributions for administrative costs.
- Surplus income payments as defined by legislation.
- Assets retained or lost under bankruptcy law.
Let’s break down these components for a better understanding.
Administrative Cost Contribution
In Canada, the minimum cost of filing bankruptcy for the first time is $2,250. This amount is payable in nine monthly installments of $250. This minimum contribution is necessary to cover administrative costs, such as government fees, the bankruptcy trustee’s time, and mailing charges.
The Surplus Income Rule
In addition to the minimum contribution, there’s a concept called “surplus income” that might increase your payments. This rule is based on the principle: “the more money you earn, the more you pay” towards your bankruptcy. The government has set net monthly income thresholds for individuals or families to maintain a reasonable standard of living. Every dollar earned above this threshold is subject to a surplus income payment of 50%. For instance, if your income exceeds the limit by $400, you’d need to make a surplus income payment of $200.
Asset Surrender in Bankruptcy
The final “cost” of bankruptcy is the assets that you forfeit when filing bankruptcy. Certain assets must be surrendered to the bankruptcy trustee to absolve your debts. However, the government has established rules for what you can retain and what your creditors can claim. For instance, in Ontario, you might need to surrender the following:
- Equity in your house if it exceeds $10,000.
- The value of a vehicle without loans (over the $7,117 exemption limit).
- Investments like Canada Savings Bonds or other non-exempt assets.
- Tax refunds for prior years not yet filed and for the entire year when you are bankrupt.
- Any RRSP contributions made in the last year before filing bankruptcy.
The bankruptcy trustee is required to realize your assets, which means converting them into cash. However, if you have a significant number of assets or a high income, you might consider a consumer proposal where you negotiate a plan to settle your debts and retain your assets.
Bankruptcy Trustee Fees
Bankruptcy trustee fees are regulated by the federal government and included as part of your bankruptcy payments. Most personal bankruptcies in Ontario fall under summary administrations. The fees in summary administrations are based on a government tariff set under Rule 128 of the Bankruptcy & Insolvency Act. The costs are computed as a percentage of realizations in a bankrupt’s estate, paid before distribution to the creditors.
Consultation with a Licensed Insolvency Trustee (LIT)
Understanding the costs of bankruptcy might be complicated and vary by individual case. Consulting with a licensed bankruptcy trustee can provide an accurate cost estimation. Some firms offer an initial free, no-obligation professional consultation to review your situation and explore all available Ontario debt management options.
Conclusion
Declaring bankruptcy is a significant decision, and understanding “how much does it cost to file bankruptcy?” is crucial. The cost of bankruptcy depends on numerous factors, including your income, assets, and the rules set by the government. It is advisable to consult with a Licensed Insolvency Trustee to explore all your options and determine the exact cost of bankruptcy in your case.
