The journey of bankruptcy is a complex one, laden with potential pitfalls and legal nuances. It’s essential to know what not to do before declaring bankruptcy. This guide sheds light on avoiding common mistakes that could jeopardize your bankruptcy process.
Introduction
Bankruptcy is a legal avenue that provides you a fresh start, free from crippling debt. It halts legal actions against you and puts an end to relentless demands from creditors. However, like any legal process, your actions before filing for bankruptcy will be scrutinized. Some mistakes can be seen as offences under the Bankruptcy & Insolvency Act (BIA), potentially obstructing your bankruptcy discharge. Others might simply lead to financial missteps.
This article will guide you through the potential pitfalls, preparing you for a smoother bankruptcy process.
1. Don’t Exhaust Your Credit Limit
A cardinal rule before filing for bankruptcy is not to misuse your credit cards or lines of credit. Your trustee will investigate if you have made any significant purchases or cash advances three months prior to filing. Ordinary usage for necessities like groceries is usually not an issue. However, intention to not pay back an exhausted credit limit can lead to serious complications.
Creditors can contest your discharge if they notice unusual or excessive transactions prior to your bankruptcy declaration.
2. Steer Clear from New Loans Right Before Filing
In an attempt to stay afloat, you might consider acquiring a new loan prior to filing. However, this could potentially backfire. Your trustee will check if you have applied for and obtained any new loans or credit right before your bankruptcy proceedings.
If it appears that you borrowed money with the knowledge that you couldn’t repay it, it might be considered fraudulent. Such debts are then excluded from your bankruptcy, which means you would have to repay them in full even after bankruptcy.
3. Avoid Favoring One Creditor Over Another
It’s human nature to prioritize paying off debts owed to friends, family members, or employers. However, in the eyes of the law, it’s not acceptable to favor one creditor over another. This is known as preferential payment.
Your trustee has the authority to reverse preferential payments, even going to the extent of suing the person you paid to return the money. This ensures that the funds are distributed equally among all your creditors.
4. Don’t Hide Assets, Income, or Debts
Transparency is crucial in a bankruptcy process. You will be required to sign a Statement of Affairs, a document that lists your assets, debts, and monthly budget. Misrepresentation or concealment of any information in this document is a serious offence under the BIA and the Criminal Code.
Besides affecting your discharge, penalties for such offences can include criminal conviction and even imprisonment for fraud.
5. Refrain from Fraudulent Property Transfer or Sale
Bankruptcy involves surrendering your assets in exchange for debt forgiveness. Tampering with these assets to avoid seizure can have severe consequences.
Selling, transferring, or disposing of assets within five years of filing can potentially deny you a discharge and even lead to criminal penalties. However, selling assets for necessities such as rent, utilities, or food is acceptable. Be prepared to justify your transactions and provide supporting documentation when required.
6. Don’t Liquidate Assets or Savings to Pay Off Debts
While it might seem like a sensible move to sell assets or use savings to pay off debt, it’s not always a wise financial decision.
For instance, in Canada, most pensions, including RRSPs, are exempt from bankruptcy seizure. Cashing in your retirement savings may not solve your debt problem. Instead, consider using the value of these assets to make a consumer proposal to creditors, repaying what you can afford while preserving your assets for the future.
7. Don’t Dismiss Collection Actions
Ignoring collection calls may lead to an escalation in collection activities, such as lawsuits leading to wage garnishments or freezing of your bank account.
Bankruptcy can halt these actions but cannot prevent secured creditors from repossessing your car or foreclosing your home if you’re behind on payments. Declaring bankruptcy sooner can improve your cash flow, enabling you to maintain payments on your car loan or mortgage to avoid these actions.
What Happens if You Commit a Bankruptcy Offence?
If your trustee finds that you’ve committed an offence under the BIA, you may not be eligible for an automatic discharge. You may have to attend bankruptcy court, which can issue an absolute or conditional discharge, suspend your discharge until a future date, or refuse your discharge entirely. Severe offences can lead to penalties, including imprisonment.
Preparing to File for Bankruptcy
To ensure a smooth bankruptcy process, take the following steps:
- Find a Licensed Insolvency Trustee. Most reputable trustees offer a free consultation, and you should not have to pay any fees until you sign your bankruptcy documents.
- Discuss other debt relief options including taking out a loan to consolidate your debt or filing a consumer proposal.
- Obtain copies of your credit report to ensure that you include every creditor in the information you provide to the trustee.
- Make a list of your assets. Bankruptcy forms group together some categories, so you won’t need to list every item you own. However, for expensive items, it’s beneficial to have them appraised for an accurate value.
- Your trustee will help you build a budget by examining your income and expenses. This information will be used to assess alternatives to bankruptcy and, if you file a consumer proposal, determine what settlement payments you might offer to your creditors.
- One crucial step is to open a new bank account before you file. If you have an account with the bank where you also have debts, your bank may use your account to satisfy unpaid debts. This is known as your bank’s right of offset. Opening a new account ensures that your funds are protected.
Conclusion
Filing for bankruptcy is a significant decision that can provide relief from overwhelming debt. However, the actions you take before declaring bankruptcy can have a profound impact on the process. It’s crucial to avoid the pitfalls outlined above to ensure a smooth path towards financial recovery.
