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How Bankruptcy Works
Just because bankruptcy has the most negative impact, that doesn’t mean it is the wrong decision for debt relief. It just means that filing for bankruptcy is a decision that you consider thoughtfully and get a second opinion. This is because when you file for bankruptcy you are essentially becoming debt free, but writing off all of your debt doesn’t come without consequences.
Bankruptcy is not something to take lightly. It is a legal procedure in which you assign or surrender your possessions to a licensed insolvency trustee. Continuing through the bankruptcy filing until it is complete will then eliminate your debt. That being said, bankruptcy does not mean that you are giving up everything. Depending on where you live in Canada, there are exceptions as to what you are allowed to keep and what you need to give up. In doing this, though, you are essentially resetting your credit rating as well as eliminating your debt.
The basics of the process is that you will sign paperwork for your licensed insolvency trustee to file. This paperwork is filed with the Office of the Superintendent of Bankruptcy in Ottawa. Once this is received the credit bureaus will be notified. Your trustee will then notify your creditors that you have filed for bankruptcy. This should happen within five days of filing. Your creditors will then no longer be able to contact you regarding the money that you owe them. Any wage garnishment that you are currently going through will also cease once you declare bankruptcy.
Eligibility for Starting and Completing Bankruptcy
When it comes to filing for bankruptcy in Canada, you only need to be $1000 in debt in order to be eligible. That being said, most people have much larger amounts of debt before they file. It is important to remember as well that not all debts are included in bankruptcy either. Certain debts like:
- Child support payments
- Alimony payments
- Secured loans such as car payments and loan payments
- Student loan debts that are less than 7 years old
These debts don’t go away with bankruptcy. Whereas debts like credit card debt, personal loans, tax debts or other types of unsecured debt are included.
You also need to keep in mind bankruptcy isn’t free either. Most of the time there will be fees that you need to pay your trustee and you will need to declare your income during the entire process. You will also need to sell anything to your trustee that you aren’t eligible to keep. In some cases you may even need to pay a determined amount to your creditors as well.
The process of completing a bankruptcy can take as little as nine months depending on your financial situation. During this completion process, on top of meeting the financial obligations, you will also need to complete bankruptcy counseling sessions. You can then get a bankruptcy discharge once all of the requirements have been met.
The Cost of Bankruptcy
As mentioned above, there is a cost to be paid to the bankruptcy trustee when you file for bankruptcy. This fee is normally around $1,800, but it can be higher. This fee not only pays the trustee, but it also covers any administration costs that are associated with filing for bankruptcy. Depending on your financial situation or if you receive any lump sums while going through the bankruptcy process, you may be required to pay more to your trustee that they will then distribute to your creditors.
What if you can’t afford the fee?
If you can’t afford to pay the fee, don’t stress, you still have options. In a case like this, the Office of the Superintendent of Bankruptcy will then assign you a trustee that will help you with the process for a reduced amount. You then may be able to get an exception on any fees required. That being said, there are administrative costs associated with filing for bankruptcy that licensed insolvency trustees have to pay. There may be no way around you paying these fees, but the rest of the cost of the bankruptcy will be reduced.
How Long Bankruptcy Affects You in Canada
When you file for bankruptcy, your credit report is going to be negatively affected. It will likely drop to or close to the lowest score possible. How this score looks will depend on the rating system the credit bureau uses. With Equifax, your credit is rated from R1-R9. R1 is considered to be perfect credit. TransUnion bases credit on a scale ranging from 300-900 with 900 being a perfect score.
Once you have been discharged from bankruptcy you are going to have to start rebuilding your credit score. This is going to be a bit difficult in the beginning though, because a bankruptcy can stay on your credit report for up to 7 years after discharge. This only pertains to the first time you file for bankruptcy. The second time it will stay on your credit report for up to 14 years.
The Rules of Bankruptcy in Different Provinces
Depending on where you live in Canada, the rules of bankruptcy are going to vary slightly. How long it stays on your credit report as well as what you are required to give up during the bankruptcy process are affected by this. Ontario, BC and Alberta are just a few that are affected. However, there are a few non-exempt assets that stay the same throughout the country. These are things like stocks, bonds, tax refund income, a second vehicle, a vacation home or anything else that is not deemed essential to live off of or own. These are sold off to pay some of your debts.
Ontario
Ontario, along a few other provinces and territories, is one of the few where TransUnion keeps a bankruptcy on your credit report for seven years instead of six. While it is only a year, it can still make a big difference when it comes to rebuilding your credit.
As mentioned before, what you are allowed to keep when filing for bankruptcy does vary depending on where you live. In Ontario, you are allowed to keep:
- An unlimited amount of clothing
- Up to $7,117 for a vehicle such as a truck or car
- Up to $14,180 worth of appliances and furniture
- Up to $14,405 worth of tools used for work
- RRSPs (not recent contributions). Life insurance policies and most pension plans
BC
In BC, bankruptcy is only kept on your TransUnion credit report for up to six years, instead of seven. Make sure you keep on top of your credit report to verify this, otherwise you can contact the credit bureau directly if it hasn’t been dropped. Keep in mind that the six years starts once you have been discharged from bankruptcy, not when it began.
What you are allowed to keep when filing bankruptcy in BC is slightly different from that of Ontario. You are allowed:
- Any vehicle equity less than $5,000
- Any equity in your home less than $9,000, unless you are in Vancouver or Victoria where it is less than $12,000
- Any value of household items up to $4,000
- Up to $10,000 worth of tools for work
Alberta
Just like BC, in Alberta, your bankruptcy will fall off of your TransUnion credit report after six years. The exemptions on what you have to give up when you file bankruptcy though, are a little bit different. You are allowed to keep:
- Food for you and family for up to a year
- Up to $4,000 worth of clothing for you and dependents
- Up to $4,000 is appliances and furnishings
- Up to $5,000 in vehicle equity
- Up to $10,000 in tolls for work
- Your principal home up to $40,000 (this is reduced if you co-own)
- Certain life insurance policies
- RRSPs, RESPs, and pensions
- Any social allowances, disability pensions, or widows pensions as long as they are separate from your regular income.
Alternatives to Filing for Bankruptcy
While declaring bankruptcy can be a good option for some, it isn’t the option for everyone. Some alternatives are consolidation loans, credit counseling or even a consumer proposal. Some may also just choose to make a deal with a collection agency if they only have the one debt. Oftentimes you can negotiate with a collection agency and, even with a collection on your credit report it can be much easier to rebuild your credit. Especially if you have one or two other credit lines on your report when you settle the collections.
Consolidation Loan
A consolidation loan can make a large amount of debt more manageable. This is because you are combining all of your debt into one equal monthly payment. It also reduces the amount of interest that you have to pay because all of the debt gets lumped into one interest rate. This is one of the most popular options, especially when it comes to high interest unsecured debts like credit cards or payday loans.
Consumer Proposal
A consumer proposal has a similar effect on your credit report that bankruptcy does but it can also be simpler to rebuild your credit from. Just like bankruptcy, a consumer proposal involves working with a licensed insolvency trustee. Instead of erasing your debt though, the trustee works with your creditors to come up with a debt settlement involving either writing off or reducing your debt based on your monthly income. This debt settlement becomes one monthly payment that you make. Your consumer proposal will be complete once all of your payments have been made.
Credit Counseling
Credit counseling is similar to a consumer proposal except the counselor works with your creditors to find an affordable way for you to pay 100% of your debt if possible. There may be some reductions, but you are usually likely to pay back the full amount using credit counseling. That being said, credit counseling only says on your credit report for two to three years unlike a consumer proposal which is around six years.
Should You File for Bankruptcy?
While bankruptcy is an option, it should be taken seriously. You should weigh your options before you file and see if one of the alternative options could work for you instead. You really don’t want to file for bankruptcy unless you don’t have any other choice. That is why it is important to get a second opinion when you are going over your options.
If you do end up deciding to go with bankruptcy, think of it as a fresh start. This will allow you to rebuild from the beginning and take back control over your financial future. Debt doesn’t have to be permanent, there are plenty of ways you can free yourself and start over.
