What are the Bankruptcy Consequences?
Bankruptcy Consequences in Canada
The bankruptcy discharge is what eliminates your debt; filing bankruptcy does not eliminate your debt.
You must complete your bankruptcy successfully in order for your debt to be wiped out.
While there are many myths about bankruptcy, if you go bankrupt there will be several bankruptcy consequences that are factual and will impact every bankrupt.
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The effects of filing bankruptcy are both positive and negative, or somewhere in between.
Before you make the decision to go bankrupt you should speak with a Licensed Insolvency Trustee (LIT) and weigh the various factors that surround a bankruptcy filing.
Bankruptcy is a legal process that has real, and long lasting consequences and you must consider everything that comes with bankruptcy seriously.
A Licensed Insolvency Trustee, previously known as a bankruptcy trustee, will provide a free consultation with you so you can discuss all of the issues surrounding going bankrupt, including what debts might survive bankruptcy, what assets you will be able to keep, and how long you will be bankrupt.
Bankruptcy is a legal process but it is administered by a trustee and is a unique legal process.
Personal Bankruptcy Discharge
The most positive bankruptcy consequence is getting your bankruptcy discharge which you will automatically receive after you complete the bankruptcy process successfully.
Your discharge is issued by the bankruptcy court and is a permanent order that prevents your creditors from collecting on any debt that was included in the bankruptcy paperwork.
Any debts that existed at the time of your bankruptcy will be listed on your paperwork, although there are certain exceptions as certain types of debt are not discharged in bankruptcy such as child support payments, or debt incurred through fraud.
Your personal discharge does not include secured debt, as mortgages and car loans are not included in bankruptcy, and does not end the obligations of anyone else who owes on the same debt that was included in your bankruptcy.
For example, if you and your spouse use the same credit card for expenses and only you go bankrupt your spouse will now be responsible for the full amount of credit card debt.
Another positive effect of filing bankruptcy is the automatic stay, which goes into place immediately following your bankruptcy being filed. As soon as your bankruptcy is filed with the OSB (Office of the Superintendent of Bankruptcy), the automatic stay goes into place (automatically, as the name suggests) which gives the bankrupt debtor many protections from creditor harassment.
The automatic stay prevents your creditors from calling you, writing a collection letter or suing you or making any other collection attempt. Wage garnishments will also stop when the automatic stay goes into place.
You will receive the protection of the automatic stay through your bankruptcy case until you receive your bankruptcy discharge.
Effect of Filing Bankruptcy on Your Credit Score
The effect of filing bankruptcy on your credit score will generally be mixed. While a bankruptcy will push your credit score down and you will receive an R9 credit rating on your credit report, which is the lowest rating.
However, most people considering bankruptcy already have a horrible credit score that is already about as bad as it can get and filing bankruptcy gives you a fresh start which always you to rebuild your credit score and in the long run, filing bankruptcy will have a positive effect on your credit score.
A record of your bankruptcy will remain on your credit report for 6 or 7 years following a first bankruptcy, or 14 years following a second bankruptcy, although you will still be able to rebuild your credit score and many people who have received their discharge and still have a bankruptcy on their credit score are able to get a mortgage (which is the hardest credit to qualify for) approximately two years after their bankruptcy discharge if they work hard at rebuilding their credit in a positive manner.
A simple tip to rebuild credit is to use a secured credit card for small monthly purchases each monthly.
Bankruptcy Consequence – Possible Loss of Assets
A serious negative consequence of bankruptcy is that you might have to surrender certain property to your bankruptcy trustee who will sell the asset(s) and distribute any funds collected from the sale to your creditors.
However, there is good news because there are bankruptcy exemptions in every province and territory that lists property that a debtor going bankrupt is able to keep.
The exemptions vary from province to province but you might be able to keep your car, home, furniture, investments and other property!
Even if your assets are not protected by the exemptions in your province your trustee may allow you to keep the asset if there is too much effort in selling the property.
Non-exempt property will only be sold if your trustee believes a net gain will be possible.
If you have significant assets that would be lost in bankruptcy you might want to consider a consumer proposal.
Bankruptcy Duties & Payments
During bankruptcy in Canada you will be required to perform your bankruptcy duties and make the required payments to the bankruptcy estate. If you have a high salary that is over a threshold set by the government based on your you will be required to pay a portion of your “surplus income” to the bankruptcy estate. Therefore, one of the effects of filing bankruptcy in Canada is that your bankruptcy could be expensive.
Therefore, one of the effects of filing bankruptcy in Canada is that your bankruptcy could be expensive.
In this case you might also want to consider a consumer proposal, because income does not effect the cost of a consumer proposal.
Your bankruptcy duties include providing your trustee with up to date reporting of your income and attending two bankruptcy counselling sessions with the trustee.
Your Debts Are Discharged
Of course, the most positive effect of filing bankruptcy is your debts will be discharged and you will be able to begin rebuilding a solid financial future.
To learn more about the bankruptcy consequences that you will face please contact one of our licensed insolvency trustees for a no charge initial consultation meeting.
If you have any questions about this or other aspects of bankruptcy or filing a consumer proposal you can set up a FREE consultation with our Licensed Insolvency Trustees.