The Truth Behind Common Bankruptcy Misconceptions
If you are struggling to pay off debts, and have run out of solutions, personal bankruptcy is a fresh start that doesn’t require you to settle or pay your debts in their entirety.
According to the Office of the Superintendent of Bankruptcy, around 100,000 Canadians a year turn to bankruptcy or a consumer proposal to get their debt under control.
However, there is still a lot of misinformation about personal bankruptcy floating around that can impact your decision to file.
For one thing, the anxiety caused by the thought of filing personal bankruptcy is often far worse than the stress of actually filing bankruptcy, which is why it’s so important to be educated and informed about your options. Bankruptcy often provides a new and fresh start in life – creditors are stopped from suing and harassing you, you are personally coached and helped through the process by the Trustee and, your debts are most often eliminated in full once you are discharged.
What is Bankruptcy?
Before you can begin to understand what is true and what isn’t, it’s important that you have a solid understanding of what bankruptcy is.
Personal bankruptcy is a legal process through which individuals who are unable to repay their debts obtain relief from most, if not all, of their creditors.
In Canada, bankruptcy is regulated by the federal government, making it an appealing option for many individuals unable to repay their debt. Highly professional Licensed Insolvency Trustees and their staffs assist bankrupts through the process.
At the end of the bankruptcy process, you will be discharged, meaning you are no longer obligated to repay your debts – with some exceptions.
Commonly Believed Myths About Bankruptcy
Due to misconceptions surrounding bankruptcy, many individuals do not seek the relief that bankruptcy provides.
Here are a few of the most common myths regarding bankruptcy, debunked, so you can begin to understand what bankruptcy is.
Bankruptcy Is an Easy Way Out
While bankruptcy is a powerful, effective and affordable debt solution, declaring bankruptcy is not a quick fix to get out of paying your debts.
In fact, a bankrupt must perform certain duties. For example, they must make full disclosure of all assets, debts, and income to the Trustee, and pay the Trustee the amounts owed to buy back equity in assets, and part of monthly income that exceeds a government cost of living. A bankrupt must also attend credit counselling meetings and assist the Trustee in its administration of the bankruptcy.
For a first time bankruptcy, the filing is noted on the bankrupt’s credit bureau report from the date of filing to 6 years post discharge/completion of the bankruptcy, making it difficult to obtain credit. A subsequent bankruptcy remains on a credit report for 14 years from the discharge.
Bankruptcy can also come with an emotional toll due to the stigma and negative perceptions associated with it.
All of Your Debts Will Disappear
While most, if not all, of your debts – credit cards, medical bills, personal loans, lines of credit, payday loans, secured loan shortfalls, and income tax and HST debts, will be discharged and extinguished, there are some exceptions.
For example, student loans cannot be discharged if you finished your education less than seven years prior to filing bankruptcy.
Past-due child support and alimony, court-ordered fines and penalties, or debt owed because of fraud are also not discharged if you file for bankruptcy.
You Will Lose All Your Property
Contrary to popular belief, if bankruptcy is declared in Ontario, the bankrupt is allowed to keep most, if not all, of their assets and property.
In Ontario, you can keep all necessary clothing, up to $13,150 in home furnishings and appliances, a vehicle with less than $6,600 of equity in it, up to $11,300 of assets and equipment required to earn a living, most insurance policies, and RRSPs, RRIFs and DPSPs (with the exception of contributions made in the 12 months prior to filing bankruptcy).
The bad news is that there is a chance you could lose your house when filing for bankruptcy. If there is more than $10,000 of equity in it, the equity will have to be paid to the Trustee, or the house will have to be sold by the Trustee.
You Will Never Be Able to Rebuild Credit
While a bankruptcy will remain on your credit report for at least 6 years after the discharge for a first time bankrupt, and 14 years post discharge for subsequent bankruptcies, there are some steps you can take to rebuild your credit rating in the meantime.
If you have a mortgage or car loan, continuing to pay these loans will improve your credit score during bankruptcy.
During bankruptcy, some lenders will agree to give you a prepaid credit card. Use of a prepaid card will not improve your credit score, but it will give you an opportunity to establish a relationship with the lender to obtain credit post discharge.
Shortly after being discharged, you may be able to obtain a secured credit card and even a car loan. A secured card is a credit card that is limited in the amount that can be borrowed, and it requires some funds to be held on deposit (often 50% of the amount borrowed) with the lender.
It may also be possible to start to get credit, and an improved credit rating, with a co-borrower. Ensure the payments and borrowings will be reported on your credit report.
And once the 6 or 14-year post discharge period is up, the bankruptcy will be erased off your credit report, allowing you to further improve your credit score.
Paying Off Your Debts is a Better Option
In many cases, attempting to pay off your debts is not a better option than filing for bankruptcy. The stresses of juggling many credit payments, the breakdown of personal relationships and one’s health, and creditor collection actions are often overwhelming.
Depending on how much debt you have accumulated, it can take many years to pay off the debt. If only minimum payments are made, it can take up to 50 or 60 years to pay off credit card balances (read the back page of your credit card statements for the actual time periods). But with bankruptcy, you can eliminate most, if not all of your debts, within 9 to 36 months, at a fraction of the cost of paying off the debts on your own (if this is even possible).
When there is simply too much debt for you to pay off in a reasonable time period, bankruptcy may be your best solution.
Getting a Mortgage Will Be Impossible
If you are struggling to pay off massive amounts of debt, your credit rating will likely already be low to very low before filing for bankruptcy. Unlike negative information on your credit report which may never be struck from the report if you do not go bankrupt, the discharge from bankruptcy eventually eliminates all bad credit history from credit reports and credit ratings.
As noted above, if you file for bankruptcy, it will appear on your credit report for 6 or 14 years post discharge, often making it difficult to obtain credit, a loan, or a mortgage during this time.
By being patient and adopting good financial habits, you will be able to rebuild your credit and eventually be able to secure a mortgage to buy a home after filing for bankruptcy. We understand that if you have been discharged for at least a year and meet a mortgage lender’s other criteria (job, down payment) it is possible to get a mortgage at competitive interest rates.
While Canadian bankruptcy laws provide legal protections for those who are in severe financial distress and offer a fresh start, bankruptcy should still always be considered a last resort.
Therefore, it’s important to carefully explore every other option that is available along with the implications of each in order to find the best possible solution.
A Licensed Insolvency Trustee can explain the pros and cons of all available debt relief solutions in order to help you make an informed decision. They will also help guide you throughout the bankruptcy process if that is the route that you choose. They are highly trained, ethical and honest professionals. These qualities are very important when financial matters must be addressed. This is even more so given the use of the internet by untrained, unqualified, and unregulated debt counsellors.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee. Since 2002, it has assisted thousands of individuals and couples successfully resolve their debt crises. Its passion – its mission – is your health and well-being!