Understanding Personal Bankruptcy: Is It the Right Option for You?
Personal bankruptcy is a complex decision that requires careful consideration. This guide will provide an in-depth analysis of personal bankruptcy, helping you to answer the question, “Is Personal Bankruptcy Right for Me?”
The Process of Personal Bankruptcy
Personal bankruptcy is a profound legal procedure that provides debtors with a chance to start afresh, free from the burden of unmanageable debts. This process offers legal protection from creditors and absolves nearly all of your debts.
The primary aim of personal bankruptcy is to grant an individual who is unable to repay their debts a fresh start.
The process is often straightforward, involving the assistance of a Licensed Insolvency Trustee throughout the bankruptcy process. There is no need for lawyers, court appearances, or obtaining permission from creditors to seek bankruptcy protection.
An array of potential debt management solutions exist, which a Licensed Insolvency Trustee will help you explore during a confidential consultation regarding your financial situation and general needs.
During your consultation, we will review all your options together, including strategies for self-directed consolidation, debt repayment plans, and Consumer Proposals. Additional resources that may assist you in managing your debts will also be discussed.
Benefits of Filing for Bankruptcy
Declaring personal bankruptcy can result in several beneficial outcomes:
- It allows for the forgiveness of nearly all types of debt, including credit cards, overdrafts, bank loans, taxes, and other dues.
- It eliminates unaffordable debt repayments from your monthly budget.
- It shields your assets and income from creditors, including halting wage garnishments
- It stops the stress of debt and gives you a financial fresh start, enabling you to move ahead with your life and achieve your future financial goals.
In certain cases, bankruptcy can be the most effective way to eliminate debt. When compared to other debt solutions, bankruptcy is usually the least costly and quickest to complete.
Impact of Personal Bankruptcy on Assets
In most cases, individuals retain all their assets throughout a personal bankruptcy. This is because certain assets can be claimed as exempt property, thus protecting them from creditors. If you possess assets exceeding the exempt values, there are ways to retain them if you file for bankruptcy.
In BC, assets exempt from seizure during bankruptcy include:
- Equity in a home in Greater Vancouver and Victoria = $12,000
- In the rest of the province = $9,000
- Household items of a (quick/garage sale) value up to = $4,000
- One vehicle of a value up to = $5,000
- Work tools of a (quick/garage sale) value up to = $10,000
- Essential clothing and medical aids value = Unlimited
- Funds held in an RRSP, except for contributions made within the 12-month period prior to your bankruptcy filing.
If you have an ongoing mortgage or vehicle loan in good standing, you can choose to continue paying these secured debts outside your bankruptcy. Alternatively, you may choose not to continue these agreements and resolve any balances owing from these debts in your bankruptcy.
Options for managing non-exempt assets and secured debts will be discussed with your Licensed Insolvency Trustee during the consultation stage before you proceed.
Understanding ‘Seize or Sue’ and Vehicle Loans in BC
Responsibilities During Bankruptcy
Throughout your bankruptcy, you have a few key duties to fulfill. Your Licensed Insolvency Trustee will guide you and provide ongoing support throughout these responsibilities. These duties include:
- Updating your address and contact information.
- Informing your Trustee of any changes to your household, family, or income situation.
- Cooperating with requests by your Trustee for assistance and information, such as tax information.
- Financial Credit Counselling Sessions: You will complete two private financial credit counselling sessions. These sessions are supportive conversations designed to offer you resources, strategies, and tools for areas of financial literacy such as budgeting and spending habits, financial planning, goal setting, understanding credit scores, and more.
- Monthly Statement of Income & Expenses: Each month, you’ll be asked to complete a basic form detailing your household income and expenses.
You may be asked to submit some, or all, of these household budget forms along with proof of your income and certain expenses to your Licensed Insolvency Trustee.
You will report your spouse’s and other family members’ incomes as part of completing your Statement of Income & Expenses. However, they are not expected to make financial contributions to your bankruptcy or undertake responsibility for the debts included in your bankruptcy.
Unless you and your spouse have jointly held debts where they have co-signed responsibility, your spouse will generally not be impacted if you declare bankruptcy.
What Happens if My Spouse Files for Bankruptcy?
Paying Required ‘Surplus Income’ or Bankruptcy Administration Fees (Determined by Income): Surplus income is the amount that your net (after-tax) income exceeds government monthly low-income guidelines. Using your Statement of Income & Expenses, your Trustee will calculate whether you have surplus income, which is then used to determine:
- The duration of your bankruptcy.
- The monthly payment amount you will need to make.
Duration of Bankruptcy
The duration of your bankruptcy varies depending on several factors. Most bankruptcies will be completed in:
9 months with an ‘Automatic Discharge’. This is the most common and applies when there is no prior bankruptcy, no opposition to discharge, all duties are completed, and household income does not require $100 or more surplus income to be paid.
21 months, if your household income is higher than the government’s ‘low income’ threshold and requires payment of $100 or more of surplus income.
Once your bankruptcy is initiated, your debts will be frozen immediately, and creditors will be prohibited from pursuing you for payment. Upon your official discharge from bankruptcy, the debts included will be written-off and forgiven by your creditors. At this point, you are debt-free!
Our goal is for you to have a stress-free experience, exiting bankruptcy in the shortest possible time to achieve full forgiveness of your debts.
Even if you’ve filed for bankruptcy before, you can still file for bankruptcy again. It’s important to explore all your options with a Licensed Insolvency Trustee before proceeding. Many people find they can avoid bankruptcy with an alternative such as a Consumer Proposal.
Cost of Bankruptcy
If your income is such that you do not have any surplus income requirements, you’ll be expected to pay a basic administrative fee for your bankruptcy instead of making surplus income payments.
In most cases, the cost payable by you to file for bankruptcy is $2,300.
The fees for bankruptcy include services and costs paid directly by your Trustee during the bankruptcy administration, which may include government filing fees, financial counselling sessions, preparation and filing of income tax returns, and Personal Property Registry Search charges.
Your regular earnings such as wages, salaries, commissions, self-employment income, pensions, etc., will all continue to be paid directly to you throughout your bankruptcy.
Other government benefits and credits (Canada Child Benefit, GST/HST Credits, etc.) will also continue to go to you as usual, with the exception of certain income tax refunds.
There is no cap or maximum amount of income you can earn during your bankruptcy.
Being able to plan your household budget and expenses is important – we will help you estimate your bankruptcy costs before you proceed. We want you to feel confident and in control as you move ahead.
When is Filing for Bankruptcy the Best Option?
Effect of Bankruptcy on Your Credit
In most cases, your bankruptcy will be known only to you, your creditors, your Licensed Insolvency Trustee, and the Office of the Superintendent of Bankruptcy (“OSB”). Credit bureaus will obtain information relevant to their records directly from the OSB.
A bankruptcy will be noted as an R9 on your credit history for six years following your discharge from bankruptcy. This is the same duration as many other common transactions such as missed payments or creditor judgments. Although the note is temporary, credit history and scores can change dramatically in as little as two to three years.
It is possible to apply for and be granted credit long before this R9 note expires from your credit history. This includes vehicle financing, mortgage renewals, etc.
It is an achievable goal to be considered for a mortgage loan in as little as two-to-three years after completing bankruptcy. Guidance on establishing credit is part of the bankruptcy financial counselling process.
There is life (and credit) after bankruptcy!
How to File for Bankruptcy
There are three basic steps to officially starting bankruptcy:
- Have a confidential consultation with a Licensed Insolvency Trustee.
- Complete an information form so your bankruptcy documents can be prepared for you.
- Sign the official bankruptcy documents.
Your Licensed Insolvency Trustee will oversee the administration of your bankruptcy filing, including communicating with creditors on your behalf and notifying your creditors of your decision to file.
We understand that considering bankruptcy can be stressful and anxiety-inducing. Please know that there are solutions, and we’re here to help you find the one that’s right for you and your situation.
Explore your options and learn how bankruptcy could get you to a debt-free financial fresh start.
