Decoding the Downside of Filing for Bankruptcy in Canada
Bankruptcy can be a viable resolution for those grappling with overwhelming debt. However, it’s not a decision to be taken lightly as it brings with it a host of consequences. This comprehensive guide will explore what is the downside of filing for bankruptcy in Canada, providing a balanced view of the pros and cons.
Chapter 1: Understanding Bankruptcy
Bankruptcy is a legal process designed to provide relief to individuals who can’t meet their financial obligations. Let’s delve into what it means to declare bankruptcy, and why it might be considered.
1.1 What is Bankruptcy?
Bankruptcy is a legal way to eliminate your unsecured debts when you can’t afford to repay them. It is administered by a Licensed Insolvency Trustee (LIT), who will ensure your rights are protected throughout the process.
1.2 Who Should Consider Bankruptcy?
If you’re unable to pay your monthly bills, or your unsecured debts outweigh your assets, bankruptcy could be a suitable option. However, it’s vital to seek advice from a reputable LIT before making this decision.
Chapter 2: The Advantages of Bankruptcy
While our focus is on what is the downside of filing for bankruptcy, it’s only fair to first look at its potential benefits.
2.1 Protection from Creditors
One of the immediate benefits of declaring bankruptcy is the ‘Stay of Proceedings’. This legal order prevents creditors from contacting you for debt collection or taking legal action.
2.2 Wage Garnishments Cease
Debtors often face wage garnishment, where a portion of their earning is withheld to repay debts. Filing for bankruptcy puts an end to this, offering immediate financial relief.
2.3 Debt-Free Status
Once discharged from bankruptcy, you’ll be free from most unsecured debts. However, some debts, like student loans less than 7 years old, court fines, and child support, aren’t dischargeable.
2.4 Clear Discharge Date
With bankruptcy, you’ll know your discharge date, providing a timeline for when you can begin rebuilding your credit.
Chapter 3: The Downside of Filing for Bankruptcy
Let’s explore what is the downside of filing for bankruptcy in Canada, providing a balanced view of the potential negative outcomes.
3.1 Financial Costs
Despite being a solution for overwhelming debt, bankruptcy isn’t free. You’ll need to make payments based on your income, and possibly pay administrative charges.
3.2 Asset Loss
Filing for bankruptcy doesn’t mean losing everything, but certain non-exempt assets can be taken. These include tax refunds, certain RRSP contributions, and more.
3.3 Credit Rating Impact
Bankruptcy will remain on your credit report for 6 years for a first-time bankruptcy, or 14 years for a second one, significantly affecting your credit score.
3.4 Fulfilment of Duties
There are duties that you must perform when declaring bankruptcy, like reporting monthly income, making payments, and providing income tax information. Failure to complete these can jeopardize your discharge.
Chapter 4: Other Debt Resolution Options
Bankruptcy isn’t the only solution for overwhelming debt. Alternatives like debt consolidation loans, debt management plans, and consumer proposals can often be less damaging options.
4.1 Debt Consolidation Loans
This involves combining multiple debts into a single loan with a lower interest rate. It can simplify debt management and reduce monthly payments.
4.2 Debt Management Plans
These are agreements with creditors to repay your debts over a set period of time. They’re typically arranged through a credit counselling agency and can lower or freeze interest rates.
4.3 Consumer Proposals
A consumer proposal is a legally binding agreement negotiated by a LIT where you agree to pay a portion of your debt over time. It can allow you to keep assets like your home and RRSP.
Chapter 5: The Decision to Declare Bankruptcy
Deciding whether to declare bankruptcy is a significant decision. It’s crucial to understand what is the downside of filing for bankruptcy and consider other options before taking this step.
5.1 Evaluating Your Financial Situation
Assess your income, expenses, debts, and assets to understand your financial situation. This will help you identify the most suitable debt solution.
5.2 Seeking Professional Advice
Speak to a LIT to discuss your options. They can provide unbiased advice and help you understand the implications of bankruptcy and other debt solutions.
5.3 Making the Decision
If you decide to declare bankruptcy, your LIT will guide you through the process, ensuring you fulfill your duties and achieve a fresh financial start.
Chapter 6: FAQs
To further your understanding of what is the downside of filing for bankruptcy, let’s address some common questions.
6.1 Will I Lose Everything If I File for Bankruptcy?
While some assets may need to be liquidated to repay creditors, many are exempt from seizure. Exemptions vary by province, and your LIT can provide specific details.
6.2 Can I Keep My Job If I File for Bankruptcy?
Yes, filing for bankruptcy shouldn’t affect your employment. Your employer won’t be notified unless you owe them money.
6.3 Can I File for Bankruptcy More Than Once?
Yes, but there are restrictions. If you’ve been discharged from bankruptcy before, a set amount of time must pass before you can file again.
6.4 Will Bankruptcy Affect My Spouse’s Credit?
Your spouse’s credit won’t be affected unless they co-signed a debt or have joint accounts with you.
6.5 How Long Will Bankruptcy Stay on My Credit Report?
For a first-time bankruptcy, it will stay on your credit report for six to seven years from the date of discharge.
In conclusion, while bankruptcy can provide relief from overwhelming debt, it’s not a decision to be taken lightly. Understanding what is the downside of filing for bankruptcy in Canada is crucial to making an informed decision. Always seek advice from a reputable LIT to explore all your options.
