Is There A More Economical Option?
There is nothing more intimidating than filing for bankruptcy, especially when you’re in such a delicate financial situation. The word itself is scary, and there are several fees involved that can be difficult to pay when cash flow is low. This article can serve as a guide to break down the costs involved in filing for bankruptcy, and perhaps shed light on other options that may suit your situation a little bit better than bankruptcy would.
What Is Bankruptcy?
Bankruptcy is a formal legal process for individual or business debtors who cannot meet their financial obligations. To legally file for protection from their creditors, a debtor needs to be formally declared bankrupt. This stops legal action from creditors along with wage garnishments (or deductions) from the debtor’s salary.
What Does the Process Look Like?
When filing for bankruptcy, debtors assign all of their assets to a Licensed Insolvency Trustee (LIT). The LIT will then sell the non-exempt assets to pay towards the outstanding debts.
Other parts of the process include the following:
- Surrendering your credit cards
- Disclosing to the LIT details regarding your assets and assisting the LIT in realizing on your non-exempt assets
- Attending the meeting of creditors, if one is held
- Disclosing certain transactions, payments, or gifts made prior to filing the assignment in bankruptcy so the LIT can determine if there were transfers at undervalue or preference payments made to creditors
- Providing all necessary tax documents (e.g. T4s) to complete outstanding tax returns
- Reporting monthly household income and living expenses to your LIT
- Attending credit counselling sessions
- Informing your LIT if you change your address
- Responding to and assisting with all requests from your LIT
- Notifying future lenders that you are bankrupt if you borrow more than $1,000
What Costs Are Associated with Bankruptcy?
The costs associated with bankruptcy are the sum of the statutory amount payable from income earned during the bankruptcy, called surplus income, plus the equity in assets that the bankrupt retains. The LIT is paid its fees from the funds its collects from surplus income payments and/or assets. If there are no surplus income payments or asset recoveries expected, the LIT will charge a minimum fee amount to cover the cost of administering the bankruptcy.
Surplus income is the excess of your monthly household income over the standard cost of living amount prescribed by the Office of the Superintendent of Bankruptcy. This standard cost of living amount is based on the size of your family unit. If you have surplus income, you are required to pay 50% of the surplus income amount to the LIT each month during the bankruptcy.
The LIT is required to realize on non-exempt assets for the benefit of the creditors. Non-exempt assets include a non-registered investment, an RESP, a home, a second vehicle, or an RV. It is the equity in these assets that you must pay to the LIT if you wish to retain possession of them. As with the required monthly payments from your income, we will enter into a monthly payment agreement to permit you to keep assets you wish to retain and can afford to buy them back.
How Does the Cost of Bankruptcy Compare to Consumer Proposal?
The fees in a Consumer Proposal are based on a formula in the BIA and they are paid from the payments made to the LIT, as per the terms of the Consumer Proposal. Higher payments towards the Consumer Proposal mean higher fees are paid to the LIT, as the LIT is paid a percentage of the funds paid into the Consumer Proposal. Depending on the amount of debt and the non-exempt assets, the fees to the LIT could be more or less than in a bankruptcy. This will be explained by your LIT during your initial consultations.
Other Reasons to Consider a Consumer Proposal
No Loss of Assets
Unlike bankruptcy, the debtor’s assets are protected in the event of a Consumer Proposal agreement. Your assets will not be seized in order for you to pay off your debt.
Less Impact on Your Credit Score
Both a bankruptcy and a Consumer Proposal are reported to the credit bureaus and will appear on your credit report. However, Consumer Proposals have a less negative rating and they will be reported for a different time period. A Consumer Proposal will remain on your credit report for the term of your Consumer Proposal, plus three years after it is paid in full. With bankruptcy, for first-time bankrupts, the bankruptcy will remain on your credit report for six years with Equifax, and seven years with TransUnion, post-discharge. For second, third, and fourth-time bankrupts, the bankruptcies will remain on your credit report for 14 years post-discharge.
Unlike the inflated payments and wage garnishing that occurs with bankruptcy and debt settlement cases, Consumer Proposals have a payment plan of affordable payments per month that won’t compromise the debtor’s financial means.
Bankruptcy can be intimidating, but an LIT can guide you through the process every step. However, Consumer Proposals may be more beneficial for protecting your assets, your financial well-being, and your credit score in the long run. Consult with an LIT, and you can make the best decision for your situation. After all, what’s important is getting yourself back on track so you can begin working towards a debt-free life.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!