What is personal bankruptcy?
Personal bankruptcy is a legally binding agreement under the Bankruptcy and Insolvency Act, which is designed to provide financial protection to individuals who can no longer repay their debts. If you are facing financial challenges, you are within your rights to ask for debt forgiveness.
Filing for bankruptcy is sometimes a necessary solution to a debt problem.
For people who need immediate relief from unmanageable debt, personal bankruptcy can be an important step towards financial recovery. However, it is always a last resort option. A Licensed Insolvency Trustee (LIT) will only recommend bankruptcy after all other debt relief options have been explored.
When you decide to file for bankruptcy, a stay of proceedings is issued, and you receive immediate protection from your creditors. This means that all collections activities will stop. Creditors are prohibited from contacting you or pursuing legal action against you. Your LIT will now deal with your creditors on your behalf.
The bankruptcy process usually takes nine months. At the end of your bankruptcy, you are legally discharged from your debts.
What debts can be included?
Bankruptcy includes most debts that are unsecured or without collateral. Examples of unsecured debts are:
| ✔ Credit cards | ✔ Store credit cards |
| ✔ Bank loans | ✔ Payday loans |
| ✔ Unpaid taxes | ✔ Medical bills |
| ✔ Student loan debt* | * If 7 years have passed since you were last a student. |
What debts aren’t included?
Secured debts—debts that are backed by an asset—as well as some other financial obligations are excluded from bankruptcy:
| ✖ Mortgage | ✖ Court fines |
| ✖ Car loans | |
| ✖ Alimony | |
| ✖ Child support |
Eligibility requirements for filing personal bankruptcy
To be eligible to file for bankruptcy in Canada you must meet certain requirements:
- You owe at least $1,000 in unsecured debt;
- You are unable to pay your debts as they come due;
- You are insolvent, meaning you owe more than the value of the assets you own;
- You must either reside, do business, or have property in Canada.
Pros and Cons of Personal Bankruptcy
Pros
- Unsecured debts are erased
- Protection from creditors
- Process can be completed in 9 months
- Credit counselling sessions
- Freedom from debt
Cons
- Potential loss of non-exempt assets
- Note on credit report for up to 7 years
- Monthly payments based on income
- Monthly budgeting statements
- Some debts are excluded
Deciding to file for bankruptcy is a big decision. It involves careful counselling from a Licensed Insolvency Trustee, who is your best resource for understanding how bankruptcy will affect your own financial situation.
There are consequences to filing for bankruptcy, but many are misunderstood and can actually hinder someone from exploring their debt relief options. Let’s take a look at some of these consequences in more detail.
What happens to your assets?
It’s a common misconception that if you file for bankruptcy, you’ll lose all your assets. In reality, many assets are exempt from seizure, such as personal belongings, furniture, tools of the trade, etc. These exemptions vary from province to province.
RRSPs are also exempt from seizure, except for contributions made in the last year. However, you will lose your tax refund for the year, plus any tax refunds from previous years that you have not yet received.
In most cases, you can keep your home and your vehicle during bankruptcy. If you have built up a lot of equity in your house or have other expensive assets that aren’t exempt in your province, you may consider filing a consumer proposal instead, which has no impact on your assets.
What happens to your income?
Throughout the bankruptcy process, you will be required to submit monthly revenue and expense reports to your LIT.
If you have surplus income, your bankruptcy term may need to be extended up to 36 months. However, if your income increases during your bankruptcy – you may find a new job while you are bankruptcy – your term won’t necessarily increase. Your monthly income is based on your average monthly income, as opposed to income month over month.
You will also need to provide your LIT with the appropriate information so they can file tax returns on your behalf.
How does bankruptcy affect your credit score?
An important consequence of filing for bankruptcy is the negative impact on your credit score.
However, this does not mean that you will never be able to borrow again.
A bankruptcy filing results in an R9 credit rating on your credit report. This will remain on your report for six years after you’ve been discharged from bankruptcy.
An important part of your financial recovery during the bankruptcy process is devoted to credit counselling and money management. You will learn how to budget, set financial goals and manage credit so that you avoid debt problems in the future. These important tools will help you improve your credit.
How does personal bankruptcy affect your spouse’s credit or assets?
If you file for bankruptcy, it only impacts your partner if your bankruptcy filing includes debts that you’ve both co-signed on (like a car payment, or a credit card). In that case, your partner is responsible for those debts, even if you have filed for bankruptcy. If co-signed loans are too much for your partner to manage alone, speak with an LIT to discuss debt relief options, like a consumer proposal, debt consolidation, or, in extreme situations, bankruptcy.
How bad is filing for bankruptcy?
One of the main reasons why debtors avoid seeking the help of a Licensed Insolvency Trustee is because of the stigma that people associate with bankruptcy. People often equate bankruptcy with feelings of shame or guilt. They may feel like filing for bankruptcy is morally “wrong”. But this type of thinking doesn’t help you move forward and is never part of the solution. In fact, it may be the reason why you’re delaying asking for help.
Personal bankruptcy: a real-life example
Everyone’s financial situation is different, but it helps to hear about other people’s stories.
This real-life debt story about a couple who were dealing with a health crisis illustrates the relief that a debt relief program, like bankruptcy or a consumer proposal, can provide to people who are going through tough times.
Who can help me decide if bankruptcy is right for me?
A Licensed Insolvency Trustee is the only professional licensed and authorized to administrate a bankruptcy filing on your behalf.
They are the most qualified to help you understand your financial situation and the different debt relief strategies that are available to you, from debt consolidation to bankruptcy, and everything in between.
Your first meeting with an LIT is free. During your consultation, your LIT will be able to provide a full debt assessment, an explanation of each option and their recommendation for your best step forward. The initial consultation usually lasts about one hour, and you are under no obligation to pursue any of our services.
Going through something like filing bankruptcy can be scary, humiliating and so overwhelming, but Adam (Cardwell) set our minds at ease. He explained everything in detail and ensured we were aware of all potential options. When it came time to proceed, he helped us make an informed decision, answered all our questions, ensured we were 100 per cent comfortable with our decision and all potential outcomes before proceeding with filing.
M.G., Newfoundland
Are your debts overwhelming your finances? To learn more about the different solutions that are available to you, reach out to a BDO Licensed Insolvency Trustee today.
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