Important Factors to Take Into Consideration Pre-Bankruptcy
Filing for bankruptcy is a big decision that shouldn’t be taken lightly. There are many things to consider before you decide if it’s the right option for you. To help you understand the seriousness of this decision, we’ll tell you everything you should factor in before signing anything.
Questions to Ask Yourself Before Filing For Bankruptcy
Is There Any Chance Your Income Will Increase In The Near Future?
If your income has recently taken a hit due to circumstances beyond your control, but there is a chance it will return to where it was before recent events—it might be worth it to wait it out and see if things pick up financially, or consider other debt relief options like debt counselling, debt consolidation, or a consumer proposal.
How Large Is Your Debt Load?
If your debt is so large it feels insurmountable, that is a good case for filing for bankruptcy. But if it could be manageable if you cut spending and renegotiate the terms of your debt with the lender or collections agency, that might be a better option to consider.
Are you still able to afford your basic necessities?
If you can’t afford to even pay your rent or mortgage or buy food because your debt payments are so high, filing for bankruptcy may be an option for you to consider. However, a consumer proposal can also be a more ideal option as it allows you to reduce your debt and pay the remaining balance with payments you can afford. A Licensed Insolvency Trustee (LIT) can help you determine which option is best.
What Is Your Credit Like?
If your score is fairly strong, it’s important to consider that filing for bankruptcy will have a significant effect on your credit for several years. For a first-time bankruptcy, an R9 rating will appear on your credit report for 6 years after the date of your discharge with Equifax and 7 years after the date of discharge with TransUnion. For any subsequent bankruptcies, the R9 will appear on your credit report for 14 years after the date of discharge.
However, if your credit rating has deteriorated significantly due to your inability to pay your debts, bankruptcy can help give you a fresh start so you can work towards rebuilding your credit.
Do You Own A Home Or Other Assets That Would Be Detrimental To Lose?
If your goal is to keep your home, then bankruptcy may not be the best option, as your home is included in the list of assets that may be seized, unless you meet the criteria for an exemption.
For instance, in Ontario, you are able to keep your home as long as the equity in your home does not exceed $10,000 and you are able to continue paying your mortgage.
In fact, filing for bankruptcy in this case might allow you to afford your mortgage payments more easily by removing other debts.
However, if your equity exceeds $10,000, you will have to reach an agreement with the LIT to buy back the equity or permit the LIT to sell the home.
Are You Prepared For The Negative Consequences?
Beyond the obvious long-term impact to your credit, are you prepared to handle the emotional toll that filing can create? Beyond that, if you work in a job that requires security clearance, or anything in the financial industry, your bankruptcy filing could come to light and have an effect on your career. At the end of the day, you have to weigh the pros and cons before making the decision.
Why Are You Considering Filing For Bankruptcy?
Are you being sued by creditors, or in danger of this happening soon? One of the main benefits of bankruptcy is the legal protection it provides. If collectors are starting to tell you they’re filing a suit against you, it may be time to consider filing. Bankruptcy stays judgments, wage garnishments, and stops all collections regarding unsecured debts – leaving you safe from these threats.
Have You Explored All Other Options?
Before filing for bankruptcy, it’s important to know that this isn’t your only option. A Consumer Proposal is a more favorable debt relief option, as it allows you to reduce your debt load – sometimes by up to 70% – and repay the balance to your creditors over an agreed upon period of time. Your consumer proposal payments will be set based on your financial situation and will not be higher than what you can reasonably afford.
Most creditors are willing to agree to the terms of a consumer proposal, as it allows them to be repaid more of what they are owed compared to a bankruptcy.
An LIT can help you determine whether a Consumer Proposal is a valid option, or if bankruptcy is a better solution.
Have You Spoken To A Professional Licensed Insolvency Trustee?
Always speak with your LIT about all alternative options before making a decision to file for bankruptcy. They will help you explore your options and the possible ramifications, while providing their honest opinion with you about whether bankruptcy is the right option for you or if there are better ways forward. They offer free consultations so you can get professional answers without going further into debt.
Once you consider all of the above questions, you’ll be well on your way to making a solid decision that will have a huge impact on your financial future. If bankruptcyis the right option for you, it can help prevent legal ramifications for non-payment and give you a path forward to get out from under insurmountable debt. But it comes with serious consequences that need to be considered. Remember, if there are other options you can implement first, it may be worth trying these before filing.
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!