Filing For Bankruptcy Comes With These Consequences
Being buried in debt can make you feel trapped. For that reason, bankruptcy seems like a great option – it can free you from your debt and allow you to feel like a huge weight is lifted.
However, bankruptcy is not necessarily a ‘fresh start,’ despite what many think. Filing for bankruptcy comes with pros and cons, and it’s important to recognize these challenges should you choose to file.
We’ve listed some of the most important consequences of filing for bankruptcy below.
READ MORE: Is It Time to Declare Bankruptcy?
The Downsides of Filing for Bankruptcy
You Risk Losing Your Assets
When you file for bankruptcy, your debt doesn’t just disappear without consequences. You may have to surrender certain assets to your Licensed Insolvency Trustee (LIT) to help repay your creditors.
There are three types of assets:
- Personal property: physical belongings, like your clothing, furniture, and vehicles
- Real property: your home or other owned real estate
- Intangible property: non-physical belongings, like financial accounts or insurance policies
The following assets are examples of assets that may not be exempt from seizure:
- Cash, non-registered investments, registered education savings plans
- Your principal residence, if the equity is greater than $10,783
- Real estate that is not your principal residence
- A vehicle worth more than $7,117, that has equity
The following assets, however, are exempt from seizure, which means, you can retain them when you file for bankruptcy:
- Furniture and appliances to a maximum value of $14,180
- A vehicle, if the equity in it is less than $7,117
- Your home, if the equity is less than $10,783
- The tools of your trade or profession, to a maximum value of $14,405
- Registered pension plans
- Certain insurance policies
- RRSPs, except for contributions made in the year before filing bankruptcy
Your Credit Takes a Hit
Unless you already have a very low credit score, bankruptcy will make your credit score plummet. It is possible to rebuild your credit score after bankruptcy, although this takes time, patience, and effort.
With a low credit score, it will likely be hard to borrow money. If you are able to obtain credit, the loan amount will likely be very small, and you will likely be required to pay a high, to very high, interest rate.
It Can Affect Your Career
Will you lose your job after going bankrupt? No – generally it is illegal in Canada to fire an employee for going bankrupt. An exception would be if it was determined that you had broken a law or company policy.
Can bankruptcy affect other aspects of your employment? Yes, it can.
In some occupations, you must disclose that you are bankrupt. In most cases, this won’t change anything, but some employers may limit the tasks you can do at work – these would have to be relevant to bankruptcy. For example, if you work in money management or consulting, your ability to give professional advice may be hindered.
If you are applying for a new job, you probably won’t run into trouble due to your bankruptcy. However, some employers may ask you if you are bankrupt, or they may perform a credit check.
You’ll Still Have Other Debt
One of the most common myths surrounding bankruptcy is that it will clear all of your debt.
In reality, bankruptcy only clears unsecured debt – this includes debt from credit cards, overdue bills, and unsecured lines of credit.
Meanwhile, secured debt is not relieved through bankruptcy – this includes debt attached to an asset or collateral object, like car loans and mortgages. If you retain your mortgaged home or vehicle upon going bankrupt, you will still have to pay the mortgage or car loan.
It Can Affect Your Spouse
If your debts are all personal (meaning you are the sole owner of them), then your spouse won’t be affected by your bankruptcy. However, there are a few common circumstances that might leave your spouse affected.
If your spouse has co-signed or guaranteed your debt, it is their debt as well. You may choose to file a joint bankruptcy.
If you have a shared or supplementary credit card connected to your main credit account, your spouse may also be liable for the debt accumulated on the original account – even if they didn’t spend a single cent.
You’ll Still Have to Make Payments
Bankruptcy may relieve you from your debt payments, but it doesn’t mean you won’t have to make any payments.
One of these payments is Surplus Income. It is a payment made to the LIT. It is calculated by the LIT and is based on your monthly net income and the number of dependents in your household.
Bankruptcy Alternatives With Fewer Downsides
Debt may make you feel backed into a corner, but bankruptcy isn’t always your only option. You may want to consider filing for a consumer proposal or applying for debt consolidation. Learn about these options below.
Debt consolidation is a process in which several debts are combined into one. An existing or new lender lends you the amount required to pay off some or all of your debts.
This option can simplify your debt management as the number of debts you will have to manage will be reduced and, it may reduce the interest rates you are paying.
A consumer proposal is a legally binding debt settlement agreement between you and your creditors. In most cases, the agreement will allow you to pay back a fraction of the unsecured debt that you owe – interest-free – over many, but no more than 5 years.
In comparison to bankruptcy, a consumer proposal may have a less negative impact on your credit rating and, can make it possible for you to retain assets you would otherwise lose possession of if you had gone bankrupt.
An LIT will work with you to prepare a consumer proposal you can afford, and which the LIT expects your creditors to agree to. Once approved by creditors, you must make regular, usually monthly, payments to the LIT. The LIT will then distribute the accumulated funds, with accounting, to your creditors.
At Baker Tilly, we know that debt can leave you feeling overwhelmed. Our team of licensed professionals can help you determine which approach to debt management is right for you. Whether you file for bankruptcy, debt consolidation, or a consumer proposal, you can rest assured knowing that our team is on your side.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee based in Ottawa. We service Ottawa and most of eastern Ontario. We have helped thousands of individuals and couples successfully resolve their debt challenges since 2002. Its passion – its mission – is your health and well-being!