Declaring personal bankruptcy is the first thing many Canadians think of when they find themselves facing financial difficulty. However, bankruptcy is a big decision and one which will affect your credit for a number of years. There are a lot of alternatives to bankruptcy that many people don't think of right away, like a consumer proposal, debt settlement, debt consolidation, and a Debt Management Program to name a few.
While going bankrupt is a good decision for some people, it's not usually anyone's best first option when dealing with insolvency or debts. There are costs involved with bankruptcy. There are fees that you are required to pay to a bankruptcy trustee, but there are also intangible costs. All bankruptcies are filed as a public record that is added to an online, searchable database. Bankruptcy also has the potential to impact future employment opportunities in some fields. We also find that it can leave some people with lasting feelings of regret. So it's in your best interest to be well informed and carefully investigate all other options before making a serious decision about your financial future.
Filing for bankruptcy is a legal process that is done through a government licensed bankruptcy trustee. In Canada the bankruptcy process is governed by the Bankruptcy and Insolvency Act, it's enforced and monitored by the Superintendent of Bankruptcy, and each province also has rules governing what assets people can keep when they go through the process and what they have to sell.
To file for bankruptcy costs at least $1,800. These fees are paid to a bankruptcy trustee who handles the whole process. The trustee looks at your assets, debt, and income and follows the bankruptcy legislation to determine what assets you can keep and what you might have to sell. The income you earn also factors into the equation. If you earn above a certain level of income for your family size (this is determined by a schedule maintained by the Superintendant of Bankruptcy), you must pay any surplus income over the set amount to your creditors each month. If you don't have any surplus income and have never been bankrupt before, then after nine months your bankruptcy will typically be discharged (ended). However, if your income is over the limit or your trustee, creditors, or the Superintedent of Bankruptcy oppose or delay your bankruptcy, it can be extended. Depending on someone's situation, they may need to attend a hearing, answer questions under oath and/or meet additional requirements to obtain their discharge. Until your bankruptcy is finally discharged, all your surplus income over the set limit is paid to your creditors. Because of the way bankruptcy is structured, it can be a cheap option for some and a super expensive option for others. Someone's assets and other considerations could also make bankruptcy an unattractive option.
Only unsecured debts can be included in a bankruptcy. Vehicle loans, mortgages, and any other loan secured by an asset, can't be included - they automatically survive bankruptcy. If you can't afford the payments on any of these debts, your creditors will expect you to sell the asset and repay the loan. Student loans typically can't be included in a bankruptcy if they are less than 7 years old. Other debts that can't be included in a bankruptcy include child support payments or arrears, spousal support or alimony payments or arrears, court ordered fines or restitution payments, government overpayments, or debts resulting from fraudulent activities.
Legally reducing or eliminating your debt through bankruptcy seriously impacts your credit rating for a minimum of six years after your bankruptcy date of discharge. During this time and it can be challenging to obtain credit. You need to show creditors why they should trust you enough to lend you money again. Not being able to renew your mortgage, get a loan, or apply for a low interest rate credit card can often impact other financial plans and puts your life on hold.