Weighing the Pros and Cons of Filing for Bankruptcy in Canada
When your debt has spiralled out of control and you need relief, it’s time to explore your options. Bankruptcy is one of the options available. But this process can seem intimidating at first; and how do you know whether bankruptcy is the right choice over other options, such as a consumer proposal?
This article will explain the signs that you should consider bankruptcy over other debt relief solutions.
What Is Bankruptcy and How Does It Work?
Personal bankruptcy is a federally governed legal process. It can be complicated. However, if you are in a dire financial situation, it allows you to start fresh with a clean slate. When filing an assignment in bankruptcy, you will surrender your assets to a Licensed Insolvency Trustee (LIT) (excluding assets with certain exemptions) in exchange for the elimination of your debts. In many cases, you may be able to keep some necessities such as your home, and personal and household objects.
The law is designed to treat unsecured creditors equally and fairly while offering you relief from overwhelming debt. Declaring bankruptcy will prevent unsecured creditors or collection agencies from calling, as well as prevent a garnishment or any other legal action from commencing or continuing.
Once you are sure that you understand your financial situation and that you won’t be able to resolve it on your own, you can book a consultation with an LIT, who will help you review your options in resolving your debts. We recommend bringing specific details of your financial situation to the consultation, including your monthly income and expenses, assets, and debts.
In the event that you decide to proceed with an assignment in bankruptcy, your LIT will work with you to prepare the required documentation. This process requires that you provide paperwork to the LIT to support your income, assets and debts. Once the bankruptcy documents are reviewed, signed and filed with the Office of the Superintendent of Bankruptcy, the process will officially begin.
Who Qualifies for Bankruptcy?
Most Canadians who need it can qualify for bankruptcy. To file for bankruptcy in Canada, you must have lived or done business in Canada within the last year, or you have assets in Canada. You must also be insolvent. This sounds intimidating, but in reality, many Canadians are insolvent.
Insolvency means owing at least $1,000 and being unable to meet your obligations as they generally become due. This alone does not necessarily mean that you should file for bankruptcy, but if you feel that you cannot get back on your feet on your own, it may be a good option to consider.
Signs You Should Consider Bankruptcy
If your financial situation has become overwhelming and you are certain that there is no way you’ll be able to get back on track without intervention, it may be time to discuss bankruptcy with an LIT. If you are experiencing one or many of the following, bankruptcy may be right for you:
- Your Debt to Income Ratio is Too High
- Your Wages Are Being Garnished
- Collection Agents Are Calling
- You’re Not Able to Make Your Monthly Debt Payments
- You Can’t Afford Your Living Expenses and Debt
- Your Consumer Proposal Has Been Annulled
- You’ve Run Out of Options
Factors to Consider When Contemplating Bankruptcy
Advantages of Bankruptcy
In many cases where you are overwhelmed by debt, filing for bankruptcy is the best course of action. There are many advantages to filing for bankruptcy. For example, declaring bankruptcy will trigger the “automatic stay of proceedings,” preventing creditors from taking action to collect their debts or garnishing your income.
If this is your first time filing for bankruptcy, you may be eligible for a discharge as early as nine months after your initial filing date. This will depend on your household income that is earned during the bankruptcy period.
Debtors declaring personal bankruptcy are required to take credit counseling. Therefore, you’ll have an expert to guide you as you rebuild your credit and develop new financial habits. Plus, without the burden of credit cards, you can learn to more effectively live within your means and prevent future financial problems.
Disadvantages of Bankruptcy
A popular myth associated with bankruptcy is that when you file for bankruptcy, all of your debts will be erased. However, this is not necessarily true. Bankruptcy only discharges certain unsecured debts such as credit cards, income taxes, personal loans, and overdrafts.
Certain unsecured debts (such as recent student loans, alimony, or child support) will not be discharged, nor will any debt incurred as a result of fraud. Secured debts such as an auto loan or mortgage are also not included, since the asset was given as collateral for the debt. If the loan is not paid, your creditor will be able to repossess the asset.
When you file an assignment in bankruptcy for the first time, your credit score will be negatively affected for the duration of the bankruptcy process plus seven years after your discharge until the bankruptcy is stricken from your record. If you have filed for bankruptcy more than once, it will take up to 14 years from the date of discharge. During this time, it can be difficult (but not impossible) to build your credit back up quickly.
Consider Other Debt Relief Solutions
Depending on your personal financial situation, bankruptcy may not be the best option for you. Contrary to popular belief, bankruptcy is not necessarily a “get out of jail free” card, nor is it a one-size-fits-all solution. You may instead benefit from a different form of debt relief such as a consumer proposal or a consolidation loan.
If you have co-signers for your debt, significant equity in your assets, most of the debts you owe are secured debts, or you have a job that requires you to be bonded and licensed by a professional association or obtain a high level of security clearance (such as law enforcement or finance), you may want to consider one of these alternative options.
Making the decision to file for bankruptcy can be tough, but in the long run it could be exactly what you need to start over financially and to finally begin building up your savings. Debt can absolutely cripple your life, and sometimes, you just need a boost to get the ball rolling. If you have questions about bankruptcy or other debt relief options, contact us to book a consultation and begin your road to financial recovery.