How does the bankruptcy process work?

What you need to know about the bankruptcy process

The bankruptcy process is a journey, not just towards debt-freedom, but towards an improved financial well-being. There are important milestones along the way, like deciding to ask for help, the immediate relief from debt, and the financial counselling that all lead to your financial recovery.

The bankruptcy process itself usually takes nine months. But for many people, their debt problems have been going on for much longer than that. Debt can be intimidating and hard to talk about. It can also accumulate faster than you might think.

A big part of the bankruptcy process is the soul-searching that happens before you reach out for help.

Is bankruptcy right for me?

For many people, bankruptcy is a scary word. Many myths surround bankruptcy and can discourage people from inquiring about the debt solutions that are available to them.

It’s important to remember that bankruptcy is a last resort option. A Licensed Insolvency Trustee (LIT) can counsel you on all your debt relief options and is the only debt professional who can guide you through the bankruptcy process. An LIT will only present bankruptcy as an option after all solutions have been explored and ruled out.

Did you know that many people who think they need to declare bankruptcy are able to restructure their debts by filing a consumer proposal? The consumer proposal is often a more affordable option than bankruptcy, and will not affect your credit rating as severely.

During the initial consultation, an LIT will compare and weigh the advantages and disadvantages of a consumer proposal and bankruptcy and explain how each debt solution may or may not fit with your financial situation. Check out our blog to read more about the differences between a bankruptcy and a consumer proposal.

How much debt is too much?

When you are considering bankruptcy or any other debt solution, the first thing to do is to look at the numbers. If you are wondering if you have too much debt, you can calculate your debt-to-income ratio or DTI:

Monthly debt payments

Add up all your monthly debt payments (mortgage or rent, student loans, car loans, credit card payments, etc.) and divide this amount by your monthly income.

Debt-to-income ratio

A DTI higher than 40% means that almost half of your monthly income is going towards debt repayment. Now is a good time to seek advice about exploring different debt relief strategies. 

Need help exploring your debt relief options?

8 steps to filing bankruptcy

When you file for bankruptcy, the process takes nine months for a first-time bankruptcy. The good news is that any harassing phone calls from creditors, wage garnishments or legal proceedings against you stop as soon as you file. You get immediate protection and can begin the financial recovery process. Here are the steps involved in filing for bankruptcy:

1. Set up a free consultation with an LIT

The first step is to sit down with an LIT. A consultation is free of charge and without any obligation on your behalf. The initial consultation is the chance to go over your debts with a federally licensed debt professional who will listen carefully to your financial situation and explain all available debt relief solutions. In many cases, an LIT can find an alternative to filing for bankruptcy.

2. Fill out an application

This does not have to be on the day of your appointment, and only occurs after you have explored all your options and have decided that a bankruptcy is the most effective solution for your situation. Your LIT will guide you through the paperwork, which includes various statements, like the Statement of Affairs and an Assignment of Assets, to disclose the details of your financial and professional situation.

3. File for bankruptcy

After you fill out and sign the required paperwork, your LIT will file the documents with the federal government. A stay of proceeding is issued that stops creditors from making harassing phone calls or taking further legal action against you. You are protected, and your LIT will deal with your creditors.

4. Your LIT notifies your creditors on your behalf

Your LIT formally notifies your creditors that you have declared bankruptcy and provides them with all the necessary paperwork. In some cases, a creditor may call a meeting to learn more about your financial situation. However, these cases are rare.

5. Any non-exempt assets will be sold

While there are provincial exemptions to the bankruptcy law, which allow you to keep some of your belongings, some of your possessions may be sold in order to repay your creditors a portion of the money owed to them. In many cases, you can keep your home and vehicle. During your initial consultation, your LIT will have already clarified how filing for bankruptcy will affect your assets.

6. Make monthly payments to your LIT

When you file for bankruptcy, you will make minimum monthly payments to your LIT for the professional services they provide you during the bankruptcy process. You may also need to make “surplus income payments” according to guidelines set by the federal government if your monthly income exceeds a certain amount. Find out more about the costs of bankruptcy.

7. Attend credit counselling

As part of the bankruptcy process, you must attend two credit counselling sessions. These sessions will review various strategies around debt management and help you plan to rebuild your credit after you have been discharged from bankruptcy.

8. You are now debt-free

After you have made all your monthly payments and completed your credit counselling sessions, you can be discharged from bankruptcy in as early as nine months after you file. (Note that the process may take longer if you need to make surplus income payments or if it is a repeat bankruptcy). Once you are discharged from bankruptcy, all the debts that were listed in your bankruptcy filing are forgiven. You can now start your next chapter debt-free.

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