Examining 7 of the most common myths about bankruptcyJan 13, 2016
For Canadians, paying off debt can be one of the most popular New Year’s resolutions. In fact, according to a recent CIBC poll, it’s been Canada’s top financial goal for each of the past six years. With oil prices and the dollar heading down, and debt levels and house prices heading up—to say nothing of a recent mortgage rate increase by Royal Bank—we could see more Canadians wondering whether they should file for bankruptcy in 2016.
When it comes to paying off debt, bankruptcy is not the only option. In most cases, it should be considered as a last resort. But even with that said, there are several myths about bankruptcy that could make the process misleading. Before deciding if bankruptcy might be right for you, let’s take a look at some of the most common misconceptions.
- I’m too rich to file for bankruptcy
Debt doesn’t discriminate based on income—turn on the TV and you’ll likely seen a story about some celebrity who’s declared bankruptcy. (Let’s just say your creditors can touch this.) However, one of the criterion for insolvency is an inability to repay debt. This means that if your income and assets are greater than your debts, you cannot file for bankruptcy because, in theory, you could sell some of your assets to pay off all your debt.
- Bankruptcy will wipe away all my debts
A bankruptcy filing can cover all your unsecured debts, which includes credit cards, personal loans and payday loans. However, you can’t claim bankruptcy for student loan debt unless you’ve been out of school for more than seven years. And secured debts, such as a mortgage or car loan, aren’t included in a bankruptcy filing. If you fail to pay your loans on these assets, they can be repossessed.
- If I file for bankruptcy, I’ll lose everything
This is not entirely true. Yes, you will have to surrender assets to a Bankruptcy Trustee, who will use the proceeds to repay your creditors. But each province has exemptions to its bankruptcy law, which means there are some items you don’t have to give up. For instance, Ontario recently increased exemptions for clothes, household furniture, farm livestock and cars, as well as adding an exemption for some of the value of your home.
- Bankruptcy will destroy my credit rating
Here’s what happens to your credit rating when you file for bankruptcy: You get an R9 rating, which stays on your file for six years after you’ve been discharged. After that, it’s gone. In the meantime, while you might not be able to obtain unsecured credit, you can still apply for a secured or pre-paid credit card, where you would make a deposit with the card company and that becomes your credit limit.
- If I file for bankruptcy, everybody will know
Bankruptcy filings are public record, but unless you’re a celebrity, they won’t be front-page news. Larger bankruptcies could end up in the legal notices, but in most cases, someone would have to register, and pay a fee, to access that information.
- I think I know my way around the court. I’ll just file for bankruptcy on my own.
Even if you were a double major in law and finance (congratulations, by the way), you could not represent yourself in a bankruptcy claim. Only a Trustee in Bankruptcy, who’s licensed by the Office of the Superintendent of Bankruptcy Canada (OSB), can negotiate with creditors on your behalf.
- I just saved a bundle by filing for bankruptcy online!
No, you didn’t. A licensed Trustee can only help you file for bankruptcy after discussing your situation in person. While there might be an occasional exception to this rule, you definitely cannot file for bankruptcy online. You should contact your credit card company and look into getting those charges reversed.
What other myths about bankruptcy have you heard? Join the conversation on Twitter using the hashtags #BDOdebthelp #Mythbusters