Canadians carry a lot of debt. We have access to a lot of credit, and we use it. On credit cards alone, Canadians carry an average of $4,000 in credit debt, and that doesn’t include what people have tied up in loans and mortgages. And for some Canadians, access to all of that credit unfortunately leads to bankruptcy.
Some of us rack up credit cards to their literal end. In fact, far too many of us do. It’s all fun and games using money that isn’t ours until it runs out and we have no way of paying pay it back. Then, when we really need the money, it’s not there.
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Eventually, collection agencies call and ring our doorbells. Defaults happen. The word ‘bankruptcy’ looms over our heads. No one wants to end up there. Sometimes, the dreaded ‘B’ word is the best, or even only, option to getting our heads back above water.
For many people, the pile of debt under becomes so high that it’s hard to see a way of getting it under control. When that happens, when it becomes too much, when you no longer have access to credit and your income is not enough to manage the debt – it’s time to file for bankruptcy. Let’s breakdown way to help with Bankruptcy.
What Is Bankruptcy?
By the time you decide it’s wise to file for bankruptcy, your finances are likely already out of control. Bankruptcy allows you to transfer the responsibility for your debts off of your shoulders – but, at a hefty price.
When you file, a Licensed Insolvency Trustee takes ownership of what your assets. There are instances where you can hold on to certain necessities (for example, your car to get to work). But those exceptions vary by province. Check the provincial rules so you know exactly what you are getting into. Ultimately, though, you hand over your assets to your trustee in order to settle your debts. It’s no joke. And it’s not something anyone should enter into lightly.
Filing for bankruptcy is a legal process. The federal government governs the process via the Bankruptcy & Insolvency Act. The act exists to protect lenders and help borrowers. After the bankruptcy is approved, your creditors receive a stay of proceedings. This prevents them from taking any legal action against you to recoup their money.
And this is when the calls from creditors finally stop.
Who Can File For Bankruptcy In Canada?
Before filing for bankruptcy in Canada, applicants must meet two eligibility requirements. First, you need to have lived, or done business, in Canada within the last year. You also need to be insolvent. This means you owe at least $1,000 and have no ability to pay it before it’s due.
Why File For Bankruptcy?
Bankruptcy hurts your credit. But, it is also necessary in many instances. If your credit is taking a hit and you can’t recover financially, it is wise to file for bankruptcy to:
- Eliminate debt
- Stop wage garnishments
- Stop collection calls and processes
- Help free you from debt
Entering into bankruptcy might sound like the end of the world. But really, it is a path to get you back on your feet.
How Much Does It Cost To File Bankruptcy In Canada?
The irony of filing for bankruptcy is that if you are insolvent — meaning you can’t even afford to repay $1,000 — the cost to file in Canada is $1,800. This fee goes directly to the trustee. It covers the cost of their time and the administrative costs of your claim. It’s a fee you can’t must pay to file. That’s because in Canada, you cannot file for bankruptcy without the help of a bankruptcy trustee.
Will An Individual Lose Their House If They File For Bankruptcy In Canada?
Losing your home is not a foregone conclusion if you file for bankruptcy. Often, a borrower makes mortgage payments, but perhaps cannot manage to repay other debts. In these cases, if you are up-to-date with your mortgage payments, the house may stay in your hands.
In Canada, there are bankruptcy exemptions. These exemptions protect against the seizure of certain possessions deemed essential. If your home or car, or other assets, are deemed essential, your Licensed Insolvency Trustee cannot access them, or their equity, to pay off your debts.
What Assets Are Exempt In Bankruptcy?
Filing for bankruptcy is not meant to leave you homeless and starving. There are a number of items protected from repossession in the event of a bankruptcy, including:
- Clothing and other personal items
- Motor vehicles, to a limit. If you have a 2019 Mercedes, they might take it. If you have a 2004 Toyota, they likely won’t touch it.
- Household furniture and food in your home
- Tools necessary for work
- Certain farm property
- Pension or RESP investments made any time before the previous 12 months
How Long Will The Bankruptcy Show On A Credit Report?
A bankruptcy sits on your credit report for six solid years AFTER it’s discharged. The clock does not start from the date you file. And if you file a second time, it sits on your report for a whopping 14 years. However, it is important to remember that just because the bankruptcy drops off your credit report, it doesn’t mean the impact of it automatically disappears. It can take YEARS to get your credit back to a healthy place. You’re looking at a solid seven to 10 additional years for the effects of that bankruptcy to disappear from your credit report.
And, you rebuild your credit from the ground up – starting with creditors who agree to take a risk on someone with poor credit. That’s why bankruptcy is a last resort. It’s a debt solution. But it’s not without some significant downsides.
How Will Bankruptcy Affect Your Future?
It’s no secret that your credit score takes a huge hit when filing for bankruptcy. But what is less clear to many people is exactly how much of an effect bankruptcy has on someone’s future.
Buying and Borrowing Power
For as long as that bankruptcy appears on your credit report, you are virtually blackballed from borrowing funds. Not all lenders see you as kryptonite, but they definitely consider you high risk. And treat you accordingly. For example, you won’t have access to as much credit. And if you do, it’s at a much higher interest rate. Want to buy a house or a car, or even secure a cell phone line? You face significant challenges while the bankruptcy sits on your credit report.
As if the world of employment isn’t competitive enough, potential employers may consider your credit. That doesn’t mean they will. In fact, it’s rare for companies to review your credit. But, depending on your line of work, they just may.
If, let’s say, you want to work in a bank, you likely need to show a decent understanding of money management. A terrible credit report is likely a death knell on that, or any other, job in the financial services industry. Likewise, in other careers, your ability to maintain and manage good credit matters a great deal. But it’s not a foregone conclusion, or even likely, that a poor credit score may affect your employment. However, it doesn’t mean it can’t, either.
How Many Times Can An Individual Declare Bankruptcy?
Theoretically, there is no limit to how many times you can file for bankruptcy. But, it becomes increasingly difficult each time. Consider the reality of having the bankruptcy show on your credit report for seven years. Then, while it’s on your report it is difficult to qualify for credit. This limits your opportunity to prove yourself as a quality borrower. If you file a second time, now you’re looking at 14 years before you can try to rebuild your credit.
So, while you can continuously file for bankruptcy, your ability to get credit becomes harder and harder. In addition, the opportunity for automatic discharge of the bankruptcy disappears.
How To File For Bankruptcy In Canada
So, you decide, along with the support of a Licensed Insolvency Trustee, to file for bankruptcy. What’s next? There is a specific series of steps.
Look At Your Debts and Understand Them
Whether you pay for a free debt assessment, or you sit down and go over your own paperwork with open eyes, you need to know what you’re dealing with. Know all the numbers. This includes what comes in, and what you goes out. Once you realize there is no way out of the hole, it’s time to declare bankruptcy.
Bring In A Licensed Insolvency Trustee
You get to pick your trustee. So find someone local who you are comfortable dealing with and trust to handle the process. They are your guide, and can answer questions and concerns you have from the outset, as well as along the way. In addition, they are the liaison between you and your creditors. In other words, they have your back to get creditors off of your back, once and for all.
Sign and File The Documents
Your trustee is in charge of this process and file your signed documents with the government. Immediately upon filing, you are protected from your creditors and the collection calls should stop.
Complete Your ‘Bankruptcy Duties’
Bankruptcy is not guaranteed, nor is it solely the responsibility of the trustee. You complete Bankruptcy Duties set out by the government. These include completing credit counselling courses, making bankruptcy payments, and reporting a monthly budget.
Discharge Your Bankruptcy
Once you complete all of the duties and requirements of filing for bankruptcy, your Certificate of Discharge officially eliminates your debts. You are now free of consumer debt and ready to get your finances back on track, and on a path to healthy financial management.
How Does Bankruptcy Work For Debtors And Creditors?
In Canada, when you file for bankruptcy, you give up your assets to offer repayment in kind to your creditors. In return, your debts are discharged. Basically, your trustee acts as an intermediary between the debtor and the creditor as a peace offering.
The conversation goes something like this: “Here are funds that you can put towards the debt you may not otherwise receive at all. In return, stop bothering to ask for it, you won’t get it anyway because they can’t pay. Deal?”
What Is Better: Consumer Proposal Or Bankruptcy?
Both a consumer proposal and a bankruptcy appear on your credit report and impact your credit score. When clients are in debt, a trustee may present both options. It can be hard to gauge which one makes the most sense for you.
What Is A Consumer Proposal?
A consumer proposal is one of the last steps someone takes to avoid bankruptcy. It also affects your credit rating.
A Bankruptcy Trustee facilitates the process of setting up a consumer proposal. The trustee reaches out to your creditors and says something along the lines of: “Mr. Smith is currently carrying $14,000 debt with you that he will never be able to reasonably pay off. He would like to avoid claiming bankruptcy, where you get less, if any, of the money he owes you. If he pays you $X, will you consider settling the debt?”
That is a simplified version of what happens. But ostensibly, if the proposal is reasonable, creditors accept something over nothing at all. This is a legal process and it affects your credit score.
Which Is Better?
Both options are legally-binding and both hurt your credit score. However, there are differences. For one, lenders do not view a consumer proposal as harshly as a bankruptcy. In addition, consumer proposals require set payments. Bankruptcy requirements, however, vary with your income. So if you get a raise, guess what? Payments on your bankruptcy go up.
The other benefit of credit counselling over filing for bankruptcy is that you hold onto more of your assets. If it is at all possible, credit counselling is definitely a more appealing option. That being said, for many consumers up to their eyeballs in debt, you may not get a choice.
Bankruptcy is not the easy way out of debt. It’s quite the opposite. This process is difficult and damaging, and is typically avoided at all costs. For some, it is the best and only option out of a debt hole dug far too deep. Consider asking a financial professional to review your debts and assets, and to recommend the debt solution that makes the most sense for you and your future.