What Can Bankruptcy Accomplish and Not Accomplish?
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The main thing a bankruptcy accomplishes is giving people a fresh financial start. All western governments have bankruptcy laws so that people overwhelmed with crushing debt can erase all or most of their debt and start fresh.
There are a number of powers that go into place when a person files bankruptcy. The Stay of Proceedings goes into place as soon as a person files bankruptcy.
This prevents unsecured creditors from taking any action to recover their debt. It also prevents wage garnishees and if a wage garnishee is in place the Stay of Proceedings will stop further garnishees. Interest on debt also stops when a bankruptcy is filed.
All the provinces and territories have bankruptcy exemptions, which are assets a person is allowed to keep.
The exemptions were enacted to provide the bankrupt some dignity and to aid in the fresh financial start.
Keeping Your Assets in Bankruptcy
For example, residents of Ontario are allowed to keep equity as follows:
- Clothing to an unlimited value;
- Your Household goods to a value of $13,150
- Tools of the trade necessary for work to a value of $11,300
- A Motor vehicle (your car) up to a value of $6,600
- A Homestead to a value of $10,000
The Exemption value is based on the equity you own in your belongings. Equity refers to the value of the property against any debts you owe on it. For example, if you have a car worth $10,000 and you owe $4,000 on the loan against the vehicle then your equity in the vehicle is $6,000 and you can keep the vehicle in a bankruptcy. Another example is your car is worth $8,000 and there is no loan against it. You have a right to $6,600 of the equity. It is common that you keep the car but must pay the excess of $1,400 to the trustee.
Exemptions are in effect for all registered retirement savings plans (RRSP’s, RRIF’s and DPSP’s (Deferred Profit Sharing Plans). Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate.
A bankruptcy, in most cases, is the cheapest and quickest way to get a fresh start. The cost commonly is $1,800 which can be paid over 12 months.
What a Bankruptcy Cannot Do
A bankruptcy cannot erase secured debt such as a mortgage or debt on a vehicle unless you give up the asset.
If a person owes more on a mortgage than the house is worth a bankruptcy will erase the debt.
This can be tricky so make sure you follow the directions of a trustee.
A bankruptcy does not allow you to keep any credit cards; even a zero balance credit card.
A person in bankruptcy cannot borrow more than $1,000 unless he tells the lender he is an undischarged bankrupt.
If you have any questions about this or other aspects of bankruptcy or consumer proposals you can set up a FREE consultation with a Government Licensed Insolvency Trustee in your local area.