In the world of personal finance, the decision to declare bankruptcy is a critical one. The question, “Is Bankruptcy The Right Thing to Do?” often leaves many individuals in a state of confusion and uncertainty. This article provides an in-depth analysis of the bankruptcy process in Canada, examining its pros and cons, and aims to offer clarity for those grappling with this weighty financial decision.
Understanding Bankruptcy
Before diving into the nitty-gritty, it is essential to have a foundational understanding of what bankruptcy entails. Bankruptcy is a legal process through which individuals or businesses unable to pay their debts can seek relief. In Canada, this process is overseen by a Licensed Insolvency Trustee, who helps to manage the bankruptcy proceedings.
Contrary to popular belief, bankruptcy does not equate to losing everything. Each province in Canada has a set of bankruptcy exemptions that protect specific assets from seizure. These can include work tools, a portion of a house’s value, or a car.
In essence, viewing bankruptcy as an opportunity to reorganize one’s financial life can be a constructive mindset. However, it is a decision that requires careful thought and thorough understanding.
Bankruptcy: A Closer Look
Having laid the groundwork, let’s delve into the specifics of the bankruptcy process, its cost, aftermath, and the impact on various aspects of one’s financial life.
The Bankruptcy Process
In Canada, a Licensed Insolvency Trustee is the only professional authorized to file bankruptcy paperwork. Once you decide to declare bankruptcy, you meet with a Trustee to discuss your financial situation. If bankruptcy appears to be the most beneficial route, the Trustee prepares the necessary documents to initiate the process.
Upon signing the paperwork, your Trustee electronically transmits your bankruptcy information to the Office of the Superintendent of Bankruptcy in Ottawa. Within five days of initiating the bankruptcy, your Trustee sends a copy of your bankruptcy paperwork to your creditors, informing them about the bankruptcy proceedings.
Financial Implications of Filing for Bankruptcy
Filing for bankruptcy comes with an immediate “stay of proceedings,” which means unsecured creditors can no longer contact you or initiate lawsuits against you. However, secured creditors, like mortgage companies, can still seize assets if you default on your payments.
Your Trustee also files your outstanding tax returns up to the date of bankruptcy, including any money owed to the Canada Revenue Agency in the bankruptcy. Therefore, upon completing the bankruptcy, you no longer owe this money.
Duties During Bankruptcy
During bankruptcy, you must fulfill certain duties, which may include attending a meeting with your creditors (in rare circumstances), providing proof of income each month, making monthly payments to the Trustee if you have surplus income, and attending two credit counselling sessions to learn budgeting and money management skills.
The Cost of Bankruptcy
As of now, the minimum cost of bankruptcy in Canada is $1,800, which covers administrative costs. However, if you have a steady income, you may have to pay a portion of your “surplus income” to the Trustee for distribution among creditors. The calculation of surplus income considers both your income and your expenses, and your Trustee can provide guidance on this.
Duration of Bankruptcy
The duration of bankruptcy depends on several factors. If you have never filed for bankruptcy before and have no surplus income, you are eligible for discharge from bankruptcy in nine months, provided you fulfill all your duties. Your discharge from bankruptcy officially cancels your debts, with minor exceptions.
After Filing for Bankruptcy
Once you file for bankruptcy, there are immediate effects like protection from creditors and long-term consequences like eliminating debts and affecting your credit rating.
Protection from Creditors
One of the significant advantages of filing for bankruptcy is the immediate “stay of proceedings,” which protects you from the harassment of unsecured creditors. However, secured creditors can still seize assets if you fail to keep up your payments.
Impact on Income Tax
Contrary to popular belief, outstanding income tax debts to the Canada Revenue Agency are included in a bankruptcy, and they are cleared once the bankruptcy is discharged. This includes any tax refunds or GST credits that arrive while you are bankrupt.
Impact on Debts
Your unsecured debts such as personal loans, credit cards, payday loans, and business debts are eliminated upon your discharge from bankruptcy. However, secured debts such as mortgages and vehicle loans are not eliminated but may be affected by the bankruptcy if you have significant equity in the property you have put up as security.
Impact on Student Loans
Outstanding student loans can be included in a bankruptcy according to the “Seven-Year Rule.” If you have not attended school for a full seven years, student loans can be eliminated in your bankruptcy.
Retaining Your Home During Bankruptcy
Retaining your home when you file for bankruptcy is possible in certain cases. If you have little or no equity in your property, and if your payments are reasonable, you may be able to retain your home. However, in other cases, particularly when there is significant equity in the home, it must be sold to make the equity value available for distribution by the Trustee to the creditors.
Life After Bankruptcy
Once your bankruptcy is complete and the court approves your discharge, you are free from the unsecured debts included in your bankruptcy and can start rebuilding your credit. A notation of your bankruptcy remains on your credit bureau reports for six years after the date of discharge but is usually removed automatically.
Seeking Help from a Licensed Insolvency Trustee
Addressing your financial difficulties promptly is crucial. A Licensed Insolvency Trustee can understand your situation and provide advice on various alternatives to bankruptcy. The initial consultation is confidential, free of charge, and without any obligation.
Deciding If Bankruptcy is Right for You
The decision to declare bankruptcy is a personal one, depending largely on your financial circumstances. If you’re uncertain about whether bankruptcy is the right move for you, schedule a free consultation with a Licensed Insolvency Trustee to explore your options.
Pros and Cons of Filing for Bankruptcy
Like any significant financial decision, declaring bankruptcy comes with its advantages and disadvantages. It’s essential to weigh these pros and cons before deciding if bankruptcy is the right thing to do.
Advantages of Bankruptcy
- Creditor Protection: Filing for bankruptcy provides an automatic stay of proceedings, offering immediate creditor protection. Creditors are no longer allowed to contact you for debt collection or take legal action against you.
- Stops Wage Garnishments: Bankruptcy halts wage garnishments, except for those related to child support payments.
- Debt Free: Upon being discharged from bankruptcy, with a few exceptions, you are free from debt.
- Clean Credit Report: Filing for bankruptcy gives you a target date for a clean credit report, allowing you to start rebuilding your credit.
- End Date: Once your bankruptcy is filed, you know when you will be discharged, helping you plan for a fresh start.
Disadvantages of Bankruptcy
- Filing Fees: Bankruptcy comes with filing fees set by the Office of the Superintendent of Bankruptcy and based on your income.
- Credit Rating Impact: Bankruptcy negatively affects your credit rating for a while. A first bankruptcy stays on your credit report for six years, while a second bankruptcy extends this to 14 years.
- Asset Liquidation: You may have to liquidate some non-exempt assets during bankruptcy. However, many assets can be kept through bankruptcy.
- Duties and Requirements: You have to report your monthly income, make payments, attend credit counselling, and provide income tax information to get discharged from bankruptcy.
Conclusion
In summary, declaring bankruptcy is a significant financial decision that requires careful thought and comprehensive understanding. While it offers a fresh start for those overwhelmed by debt, it also has far-reaching consequences. Therefore, before deciding if bankruptcy is the right thing to do, it’s crucial to weigh the pros and cons and consult with a Licensed Insolvency Trustee.
