These are the most common myths about bankruptcy in Canada

These are the most common myths about bankruptcy in CanadaDebunking the Most Common Misconceptions about Bankruptcy in Canada

In today’s financial climate, the Bankruptcy and Insolvency Act (BIA) in Canada provides a legal sanctuary for those drowned in debt. It’s a second chance for honest debtors to make a fresh start. However, the concept of bankruptcy, and insolvency in general, is shrouded in myths and misconceptions.

These misconceptions stem from a lack of personal experience, influence from U.S. bankruptcy laws, and misinformation circulating on the internet. In this article, we aim to debunk the most common myths about bankruptcy in Canada and provide a clear understanding of the rights and options available to Canadians in financial distress.

1. Fear of Losing One’s Home

The first myth is the belief that declaring bankruptcy will result in losing one’s home. The truth is, a very small fraction of people who file for bankruptcy in Canada actually lose their homes. The net equity in your home, the value after subtracting any liens against it, is what interests the creditors. Some provinces, like Ontario, even have exemptions for this up to $10,000.

In the event of non-exempt equity in your home during bankruptcy, a settlement payment is made to the estate through the Trustee. After discharge, the Trustee releases its interest in the property. Filing a Consumer Proposal, an alternative to bankruptcy, allows you to keep your assets.

2. Misbelief of Losing Personal Possessions

Another widespread myth is the fear of losing personal possessions. In Canada, personal effects, furniture, and household goods are exempt during bankruptcy. Exceptions are made for extraordinary valuable items like fine art. You are allowed to exempt one vehicle with a net value of $6,600 or less. If your vehicle is financed or leased, you can keep it, provided you continue making payments.

3. Misconception about Job Loss

Many people believe that declaring bankruptcy will cost them their jobs. However, the law in Canada makes it illegal for an employer to terminate employment due to bankruptcy. Unless a wage garnishing order is in place, employers are often unaware of an employee’s bankruptcy status. Certain professions, like brokers managing trust accounts, may have rules against filing bankruptcy, in which case a proposal could be filed instead.

4. Unfounded Fears of Imprisonment

While it may seem far-fetched, some people fear imprisonment due to bankruptcy. Although the BIA does stipulate imprisonment under s. 198 for Bankruptcy Offenses, it’s extremely rare and usually a result of fraudulent activities.

5. Misunderstanding about Spouse’s Credit Impact

Many married individuals worry that their bankruptcy will negatively impact their spouse’s credit. This is a myth. Filing bankruptcy cannot affect another person’s credit. If you have joint debts with your spouse and only you file for bankruptcy, your spouse would be liable for those debts.

6. Assumption about Future Credit and Home Purchase

Many people assume that bankruptcy will prevent them from obtaining future credit or buying a house. Contrary to this belief, bankruptcy, which is rehabilitative in nature, does not impose a lifelong punishment. The record of bankruptcy stays on your credit report for six years following discharge for first-time bankrupts. After that, it’s removed. Your ability to buy a house depends on your financial circumstances such as income, assets, spending, and obligations.

7. Apprehension about Mortgage Renewal

People who currently hold a mortgage often worry that they won’t be able to renew it after bankruptcy. However, provided they continue to make payments and remain with their existing lender, they usually face no issues with renewal.

8. Misapprehension about Taxes in Bankruptcy

A common myth is that taxes cannot be included in bankruptcy. This is untrue. In Canada, all taxes owing are unsecured debts fully dischargeable by bankruptcy. This includes personal income tax, HST, and business payroll tax.

9. Misbelief about Lottery Winnings

Despite the odds against winning the lottery, many people ask if they can keep any winnings during bankruptcy. In Canada, any unexpected windfall during bankruptcy is considered a non-exempt cash asset. This asset is used to pay off the creditors, and any remaining winnings are returned at the time of discharge.

10. Myth about Income Restriction

Some people believe that the Trustee will limit the amount of income they can earn during bankruptcy. The truth is, while the Bankruptcy Act sets out surplus income standards, it does not restrict how much a bankrupt individual can earn. However, if they earn more than the set levels, they must pay more towards their debts.

Bonus Myth: Mortgage Shortfalls and Bankruptcy

A prevalent myth is that mortgage shortfalls cannot be included in bankruptcy in Canada. However, this is false. Mortgage shortfalls can indeed be included in bankruptcy or a consumer proposal.

Bankruptcy offers an escape route for those burdened with insurmountable debt. However, misinformation and myths surrounding bankruptcy often cloud its true purpose and benefits. By debunking these myths, we hope to provide a clearer understanding of bankruptcy in Canada.

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