Situations Where Bankruptcy Is Not A Viable Option

No one ever plans to file for bankruptcy. But, sometimes, when facing large amounts of debt and financial difficulty, declaring bankruptcy may seem like your only option.

However, it’s important to understand that it’s not necessarily the right course of action for every person and circumstance. There are many reasons why bankruptcy may not be a suitable option for debt relief. However, it’s also important to know that you are not alone and there are alternative solutions to help you tackle your debt.

What is Bankruptcy?

Bankruptcy can provide you with a fresh start when you are unable to repay large amounts of debt owed to your creditors. You will be required to work with a Licensed Insolvency Trustee (LIT) who you will surrender your assets to – with some exceptions – to help pay your creditors.

By the end of the bankruptcy process, most, if not all of your debts, will be eliminated.

When Is It A Good Idea to File for Bankruptcy?

Everyone’s financial situation is unique, and bankruptcy is not a one size fits all solution. However, there are some indicators that bankruptcy may be appropriate. These include:

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• Loss of income/unemployment means you do not have the money to pay your debts.
• You are making the payments, but your interest rates are too high, making it difficult to put a dent in your debt load.
• You are paying so much of your monthly income towards your debt that you have no money left for everyday expenses and you are relying on credit cards to purchase gas for your car and groceries.
• You are so overwhelmed about your financial situation that it’s causing severe anxiety and stress, affecting your health, and leading to loss of sleep.
• You have reached your borrowing limits and are unable to receive any additional financial assistance from your bank.
• You are being garnished by a creditor.
• You are behind in rent, mortgage payments, or CRA tax obligations.

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These are all strong indications that bankruptcy could benefit you. However, it’s still important to speak with a LIT to determine if bankruptcy is your best option.

Cases Where Bankruptcy Is Not the Best Option

While there are many reasons to file for bankruptcy, there are also a lot of reasons why it may not be the best option. Here are some of the top reasons why bankruptcy may not be suitable for you.

Most of What You Owe Are Secured Debts

When filing for personal bankruptcy, you are only relieved of unsecured debt – credit cards, personal loans, medical bills, payday loans, etc. Secured debts, such as mortgages and financed car loans or leases, are not discharged should you retain the asset that has been secured.

Therefore, when the majority of debt you are struggling with is secured, filing for bankruptcy may not provide you with the relief you need.

In fact, during bankruptcy, assets like your home or car may need to be sold to help pay your debts, or to reduce your monthly expenses to an amount you can afford to pay.

It’s also important to note, that bankruptcy will not discharge student loans when you go bankrupt if you have not been out of school at least 7 years. Bankruptcy will also not discharge child and spousal support arrears and court-ordered fines and restitution payments.

You Have Co-Signers for Your Debt

When you have co-signed debt for, or by, another individual, filing for bankruptcy may also affect their credit rating and finances.

A co-signer has agreed to assume responsibility for your debt if you are unable to pay. Bankruptcy will leave them fully responsible for your debt.

If the co-signer is unable to take over the payments, this will affect their credit rating, and give the creditor the ability to legally pursue them for payment.

Therefore, it’s critical that you take into consideration your co-signers and how they will be affected if you are considering bankruptcy.

You Can’t Afford to File for Bankruptcy

While bankruptcy is often seen as a ‘get out of jail free card,’ this couldn’t be further from the truth.

What you may not realize, is that there is a cost to going bankrupt, as you are required to pay your LIT for its services and several government taxes the LIT must pay on your behalf.

So how much does it cost? That depends.

The cost of bankruptcy in Canada is based on the number of individuals in your family household, and the monthly net income of your household.

If your monthly net income is below the Canadian government cost of living standard for the number of individuals in your home, the amount you will have to pay the LIT will be determined by the complexity of your finances. A typical minimum cost is $2,300 to $2,700, paid over 9 months. From $2,300, the LIT must remit $503 to the government in various taxes, pay $43 to the creditors, leaving a fee to the LIT of $1,754.

If your average monthly net income is $200 or more above the Canadian government cost of living standard for the number of individuals in your home, described as surplus income, you will be required to pay half of the surplus income to the LIT. The calculations can be complicated, and they are adjusted for certain expenses, such as child or spousal support and medical expenses, as well as household income earned by your spouse. If surplus income is payable, it extends a first-time bankruptcy from 9 to 21 months, and a second time bankruptcy from 24 to 36 months.

In addition, if you wish to retain ownership of assets that the LIT would otherwise have to sell, you will have to make arrangements with the LIT to pay the equity in the assets.

It May Impact Your Job

In certain cases, filing for bankruptcy can affect a lot more than just your finances and credit rating – it can even affect your career.

If you work in law enforcement, or finance, or have a job that requires you to be bonded, licensed by a professional association, or obtain a high level of security clearance, bankruptcy could potentially put your job at risk.

Or, if you are looking towards making a career change and working in one of these occupations, having a bankruptcy on your record could stand in the way of that.

Be sure to review your employer’s or professional association’s requirements before going into bankruptcy.

You Have Significant Equity in Your Assets

In Ontario, you may keep your home during bankruptcy if the equity in it is less than $10,000, and you are able to continue making the mortgage payments.

If the equity in your home exceeds $10,000, it will be sold by the LIT, or mortgagee, unless arrangements have been made with the LIT to buy back the equity.

So, if you’ve owned your home for some time, and have been making mortgage payments for many years – or have paid it off – you run the risk of losing your home should you file for bankruptcy.

You Have Other Options Available

Bankruptcy should always be a last resort for those in a truly dire financial situation.

Therefore, it’s crucial, that when you are considering bankruptcy, you consider all available options. Speaking with a Licensed Insolvency Trustee (LIT) should be a part of this process.

Here are some of the options a LIT may present you with.

Alternative Debt Relief Solutions

Consumer Proposal

A consumer proposal is administered by a LIT, who will work with you to develop and present a payment plan to your creditors. A consumer proposal will, typically, dramatically reduce the debt that must be paid. All interest is usually forgiven as well. Monthly payments are made over a time period that cannot exceed 5 years. The LIT will also provide you with money management, budgeting, and money saving skills.

Debt Consolidation Loan

A debt consolidation loan is a loan that allows you to combine several other loans or debts into one single debt. This means that instead of making multiple monthly payments towards all your different debts with high-interest rates, you will just be making one with a lower interest rate.

Debt Management Plan

Under a debt management plan, you will work with a not-for-profit debt or credit counsellor who will combine your existing debts and negotiate a settlement with your creditors. If creditors choose to participate, you will be required to pay back all principal owed, but over an extended time period.

When considering filing bankruptcy, it’s very important to weigh all of your options, and to speak with a Licensed Insolvency Trustee to get their professional opinion on which solution best suits your circumstances.

Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee. 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!