Guide To Bankruptcy: What The Process Looks Like
Insolvency filings for 18 to 34-year-olds in Canada are increasing every year. Student debt and rising costs of living are forcing more people than ever into a difficult financial situation. If you find yourself in this situation, there are options available.
Read on as we discuss if you should file for bankruptcy at a young age or if other options are preferable.
Debt Crises Young People Often Find Themselves In
It is increasingly common for students, and recent graduates of college and university, to be struggling with an overwhelming debt load. We find that the debts are not only comprised of federal and provincial student loans but, as well, credit card debt and bank loans. Students have told us that their debts are attributable to not only their need to borrow to pay tuition fees but to also meet their monthly expenses and cost of living. Below are a number of problems young people may encounter.
Credit Card Debt
Canadians currently have a combined credit card debt of around $74 billion. Despite a dip during the pandemic as people saved and paid debt off, this figure remains high.
Credit cards are an easy option when individuals are attending school. One might assume once they have completed their studies or when a higher paying position comes, the credit cards can be paid off. If this doesn’t happen, and other pressures mount up, so do the credit card debts and their high levels of interest.
Student loans in Canada can be complex. There are federal and provincial government loans in addition to bank loans geared towards students to assist in funding their education. Terms for the loans will differ based on the lender and the territory.
After graduation, with government student loans, you are given a six-month period of payment relief. Once the six-month period expires, the borrower then needs to start the monthly repayment of the loan. If you haven’t received notification regarding the repayment, it is best to log into your account online or contact the National Student Loan Service Centre or applicable lender to determine the repayment terms.
Payday Loan Cycle
Anyone experiencing financial difficulty or that has a poor credit rating may consider obtaining a payday loan. These short-term loans often have astronomically high rates of interest and fees and are extremely difficult to pay off. Once in the cycle, it can be almost impossible to get yourself out.
Mortgages They Can’t Afford
Considering the real estate market over the last two years, purchasing a house may have required a significant mortgage. With the recent increase in interest rates, the mortgage payments may not be sustainable. In addition to the mortgage payments, many first-time home buyers have not considered the cost for things like property taxes, utilities, insurance and maintenance that also add considerably to the monthly expenses of home ownership.
Should I File for Bankruptcy in my 20s?
Filing for bankruptcy should always be a last resort. Many people do not realize there may be other options available. While bankruptcy can be considered to be a fresh start, the impact on a credit report for seven years following discharge means it will hinder their ability to qualify for loans, mortgages and they may not be able to finish their education.
What the Bankruptcy Process Looks Like
The bankruptcy process in Canada is not a quick one. Individuals considering bankruptcy need to contact a Licensed Insolvency Trustee (“LIT”). An LIT is licensed by the Office of the Superintendent of Bankruptcy (”OSB”) and is the only professional permitted by law to administer bankruptcy estates.
The LIT will help complete all of the paperwork, including a Statement of Affairs, which lists your assets and liabilities and also by preparing a monthly income and expense statement. These documents are then registered with the OSB and sent to the creditors.
Once the process has started, the bankrupt will be assigned a number of duties to complete the process to receive their discharge. These duties include completing two counselling sessions, providing monthly income and expense statements and proof of income, making payments and providing income tax information. The bankrupt is also required to assist the LIT in realizing on any assets the bankrupt owns that are not exempt. Upon completion of these duties over a period of time, they can be eligible for a discharge. A first-time bankrupt, with low income, may be eligible for their automatic discharge in as little as nine months.
Why You Should Consider a Consumer Proposal First
One alternative to filing an assignment in bankruptcy is the consumer proposal process. A consumer proposal a legal process pursuant to the Bankruptcy and Insolvency Act. It allows the debtor to avoid bankruptcy. This process involves making a settlement offer to the unsecured creditors to repay typically a percentage of the debt owed. Only an LIT can assist a debtor in filing a consumer proposal. The consumer proposal offers the same protection from the creditors as a bankruptcy. Unlike bankruptcy, a consumer proposal allows debtors to retain their assets.
What the Consumer Proposal Looks Like
To begin the process, you must contact an LIT. As an intermediary between you and your creditors, the LIT will review your finances, provide you with advice and information about your options, prepare the consumer proposal and other forms for your signature, file the consumer proposal with the Official Receiver (an employee of the Office of the Superintendent of Bankruptcy, an agency of the federal government) and oversee the administration of the consumer proposal. The LIT is also responsible for dealing with telephone calls and queries from creditors and providing them with various reports on the status of the consumer proposal.
Once a consumer proposal is filed, a stay of proceedings is in effect. This means that the creditors can no longer pursue payment from you, stops legal proceedings and garnishments.
Upon approval by the majority of the creditors in value and the Court, the consumer proposal is binding on all unsecured creditors.
Once approved, the debtor must complete the terms of the consumer proposal, which typically requires monthly payments over a number of years and the completion of two financial counselling sessions. Upon completion of the consumer proposal, the unsecured debts will be discharged.
Should You File for Bankruptcy?
Filing for bankruptcy should be your last resort. A consumer proposal is the preferred option for many, with more certainty and greater flexibility, allowing debtors to make one manageable payment to the Trustee and retain their assets. It is important to consult with a professional to review your unique situation in detail and the options available.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee. We have a team of professionals, working full-time in this area, to ensure that individuals in financial difficulty will be fully advised of their options and the professional services that are available to them. Contact us here for a free consultation to let us help you get back on your finances back on track.