While no-one wants to file personal bankruptcy, ultimately, it can be the necessary bridge between continuing to drown in payments and getting out of debt.
In this article, we explain everything you need to know to decide whether you’re at the point of needing to file bankruptcy, what exactly it does, and how it would impact you and your family.
What is bankruptcy?
Who should declare bankruptcy?
What does bankruptcy cost?
How long will you be bankrupt?
What do you lose if you file bankruptcy?
How does bankruptcy affect your credit?
Does bankruptcy affect your spouse?
Where to get more bankruptcy advice
Filing for bankruptcy means that you formally declare that you are unable to repay your debt. You surrender certain assets to be liquidated to pay your creditors and make additional legislated bankruptcy payments in exchange for which your debts are eliminated.
It is a way for an honest but unfortunate debtor, burdened with excessive debt, to achieve a fresh financial start.
Bankruptcy in Canada is filed through a Licensed Insolvency Trustee who is an officer of the court, trained and regulated by the government to administer bankruptcies.
To file bankruptcy you must:
- owe at least $1,000
- be unable to repay your debts as they come due
- not own enough assets to repay your debts either
Why would someone file bankruptcy?
People file bankruptcy because they cannot afford to repay their debt on their current income. They may also be facing creditor actions like a wage garnishment and need the creditor protection provided by the Bankruptcy & Insolvency Act.
While sometimes bankruptcy is caused by over-use of credit, most people file bankruptcy for:
- burdensome student loans and payday loans
- credit card debts accumulated during a period of unemployment or underemployment
- debts resulting from the financial impact of a divorce or separation
- debts from helping family and friends
- debts created due to an illness or medical issue
- tax debts from self-employed earnings, a small business or RRSP withdrawals
If you are interested in the real reason people file bankruptcy, this article on the causes of bankruptcy based on a Hoyes, Michalos & Associates study is worth a read.
If your income is below a certain threshold and you have no assets, a first-time bankruptcy will generally cost $200 a month for 9 months or $1800.
You will also lose at least one tax-refund during your bankruptcy.
Bankruptcy does not affect all your assets. There are specific provincial exemptions that limit what a trustee can seize. Those exemptions generally include:
- personal necessities like closing
- basic household furnishings and appliances
- a car valued below the provincial exemption limit
- tools used for work up to a certain limit
- in some provinces, some home equity
- RRSPs and most pension
Any valuable assets outside these limits will be seized and sold by the trustee for the benefit of your creditors. You can arrange to make payments during your bankruptcy to ‘buy back” these items from the trustee if you want to keep them.
If you earn a high enough income, your bankruptcy costs will increase as you will have to pay something called surplus income. The concept behind surplus income is simple: the more you make, the more you pay. The requirement to pay surplus income is intended as a way for debtors who have the ability to do so to make reasonable additional payments towards your debt. Because this can create high monthly payments, most people with high surplus income choose to file a consumer proposal as an alternative to bankruptcy.
Your monthly Surplus Income Payment is calculated using the following formula:
Net Income – Threshold = Surplus x 50% = Payment
Thresholds are updated every year and take into account your family size. You are also allowed to deduct from your income eligible amounts for support payments, child care payments, medical bills, fines and penalties, any other employment expense that you normally deduct when preparing your income taxes. If you want to learn more about surplus income from Bankruptcy-Canada.com
The official term for a bankruptcy ending is a ‘discharge’, and first-time bankrupts with no surplus income are eligible for discharge in 9 months.
If you have a higher income, have been bankrupt before, or do not complete your required duties, your bankruptcy will last longer.
- 9 months automatic discharge if no creditor objects, you fulfill all your duties, and do not have surplus income exceeding an average of $200 per month.
- 21 months automatic discharge if no creditor objects, you fulfill all your duties, but have a surplus income of more than $200 per month.
- 24 months automatic discharge if no creditor objects, you fulfill all your duties, and do not have surplus income exceeding an average of $200 per month.
- 36 months automatic discharge if no creditor objects, you fulfill all your duties, but have a surplus income of more than $200 per month.
Amount of tax debt you owe to Revenue Canada
- If you owe more than $200,000 of tax debt to Revenue Canada, including penalties and interest, and that amount represents 75% or more of your unsecured debt, you will be required to go to court to apply for discharge.
Completion of duties
- During your bankruptcy you will be required to perform certain duties, including attending two mandatory counselling sessions, reporting your income and making required payments. Failure to complete the requirements of your bankruptcy will jeopardize your automatic discharge and lengthen your bankruptcy.
Opposition of discharge
- Occasionally, although rarely, creditors, the trustee or the Superintendent of Bankruptcy may oppose a bankrupt’s discharge. When this happens, the matter goes to mediation or bankruptcy court.
Filing for bankruptcy doesn’t necessarily mean that you will lose everything you own. In fact, there are laws in place to make sure that you aren’t forced to give up things that you need to survive. These are known as ‘exemptions’, and include things such as low-value cars, personal items up to a nominated value, and equity in your home up to a certain value.
The law varies from state to state, so it’s essential that you work with a professional advisor will be able to help you explore the options available to you so that manage your debts whilst keeping things like your home and car.
You may also be required to forfeit some of your income as part of your bankruptcy. If you earn more than it is deemed your household needs to survive (known as ‘surplus income’), then part of that extra income must be paid to your trustee as part of the settlement with your creditors. The idea is that the more you earn, the more you can afford to repay. The amount of surplus income that you’ll have to pay is prescribed by law, so it’s not something your trustee will be able to negotiate for you.
A first-time bankruptcy will remain on your credit report for 6 to 7 years, depending on the credit bureau.
All assisted debt repayment programs, whether through a credit counsellor or licensed insolvency trustee, will have a short term impact on your credit. We do not recommend choosing which program is best for you based on your credit report. There are not enough differences between the programs to make this a deciding factor. Instead, choose the program that works best for you financially based on your budget and your debts.
Bankruptcy is just one option to eliminate debt you can’t afford to repay. The longer you carry that debt, the worse your credit will become and the longer you delay your recovery. Bankruptcy can be a step in the process of rebuilding credit for those with too much debt to repay on their own.
If you declare bankruptcy for your own debts, your filing has no impact on your spouse or their credit report.
Bankruptcy is a final option after you’ve exhausted all other avenues, so it’s really important that you get sound advice for your specific situation. Only Licensed Insolvency Trustees are regulated by the Canadian government to provide bankruptcy. In addition, they are trained and required by law to review other debt repayment options with you before recommending you file. This is known as a debt assessment, and even this process is mandated by the federal government.
You can book a free, no-obligation consultation with a dedicated bankruptcy counsellor, who’ll help you decide whether it’s the right solution for you.
Remember, at this stage, it’s just a consultation. You aren’t committing yourself to anything and you have the final decision about how you wish to continue.
So don’t be afraid to reach out for advice – it could be the best decision you ever made to get your life back on track.