If you are thinking about filing for bankruptcy, you likely have more than a few questions. Declaring bankruptcy can impact many areas of your life, from your ability to own a credit card to owning a home. Before declaring bankruptcy, it’s important to understand what bankruptcy is and how it can impact your life.
Bankruptcy is a legal process that helps people struggling with repayments eliminate all or part of their debt. Bankruptcy proceedings are handled by a Licensed Insolvency Trustee (LIT) and are overseen by the federal courts.
While bankruptcy can help eliminate some of your debt, it is not something that should be taken lightly. Declaring bankruptcy has serious, long-term effects that can impact numerous areas of your life. Below are 6 ways that filing for bankruptcy can impact your life.
Your Credit Rating
Declaring bankruptcy has a large negative effect on your credit score. Anyone who declares bankruptcy is automatically assigned the lowest possible credit rating, which will remain on your record for a minimum of 6 years.
A low credit score affects your ability to obtain future lending, including credit cards. Lenders may be wary about providing any kind of financing, which can lead to higher rates of rejection or higher interest rates.
If you decide to apply for any kind of line of credit after being discharged from debt, it will be very important that you pay all your bills on time. This will help to eliminate old bad habits and start to rebuild your credit rating.
While a credit card is considered unsecured debt, your mortgage and vehicle financing are both held by secured creditors. This means that they have a right to repossess the relevant property if you fail to make regular payments on time.
Getting approved for a mortgage after bankruptcy is extremely challenging. You may have difficulty finding a lender willing to offer you a mortgage, and those who do will likely charge an inflated interest rate or require you to pay an increased down payment.
If you can afford to make monthly payments and currently have a mortgage on your property, consider asking your LIT about reaffirming your current mortgage during debt proceedings. This would allow you to keep your home while paying off your mortgage, free from other debts.
When it comes to bankruptcy, your debts are your own. Creditors cannot pursue your spouse for repayment unless you jointly own an asset, and even in that case, bankruptcy only includes the portion of the joint asset that you actually own. However, this portion may be sold and distributed to your creditors.
If you own any joint assets with your spouse, make sure you let your LIT know right away.
It is also important to make your LIT aware of any loans that have been co-signed by someone other than your spouse. Once you file for bankruptcy, your co-signer becomes solely responsible for repaying your loan and you waive your right of ownership in that asset.
Luckily, filing for bankruptcy will not impact the credit score of your co-signer, unless they fail to make repayments on their own.
Even after you declare bankruptcy, you will need to be able to afford basic living expenses. The courts know this, and so your wages are mostly unaffected by bankruptcy.
However, your LIT will have you fill out a form where you list any and all forms of income that you earn. There will be compared to the standards established by the Office of the Superintendent of Bankruptcy. If your income exceeds the maximum amount, you will be required to make payments to your LIT, who will then distribute this money to your creditors on your behalf.
Your Student Loan Debt
Many Canadians have some form of student debt. In fact, the Canada Student Loans Program announced in a 2017 report that they had over 1.7 million borrowers in their portfolio.
Declaring bankruptcy will release you from the obligation to repay your student loans, but only if you have been out of school and not a full time or part time student for at least 7 years. If you have only recently finished school, it may be beneficial to consider instead the Government of Canada’s Repayment Assistance Plan. This plan helps those with federal student loans to pay back what they can reasonably afford at a pace that works for their circumstances.
While this information may seem overwhelming, it’s important to remember that you won’t be going through bankruptcy alone. A Licensed Insolvency Trustee (LIT) will be there to guide you every step of the way and to make the process as simple and stress-free as possible. If you are looking for a LIT who has your best interest at heart and will treat you with the respect you deserve, look no further than Blanchard & Co. Brian Blanchard (LIT & CIRP) and his team are dedicated to freeing their clients from debt, regardless of their circumstances.
Book your FREE consultation at Blanchard & Co TODAY by calling (403) 348-5880.