What is Bankruptcy?
Bankruptcy is the legal process of assigning your non-exempt assets over to a Licensed Insolvency Trustee (LIT) in order to eliminate your debt, as overseen by the federal bankruptcy court and regulated by the Bankruptcy & Insolvency Act.
Bankruptcy is intended to provide financial relief to consumers who find themselves in over their heads in debt while simultaneously treating creditors fairly. The Canadian insolvency process is also intended to teach debtors healthy and sustainable financial practices through financial counselling, which they can apply to their financial decisions once they are discharged from bankruptcy.
The process of declaring bankruptcy can be complex and confusing, which is why choosing a licensed insolvency trustee (LIT) plays an important role. A LIT will help guide you through the bankruptcy process and deal with creditors directly on your behalf to make sure the entire bankruptcy process is simple, straight forward, and complies with all applicable rules and regulations.
Declaring bankruptcy may seem appealing since it can eliminate part of or all your current debt, but it can have serious, long-term consequences for your credit and financial decisions.
Who Can File Bankruptcy?
Many consumers may not realize that not everyone in Canada can go into personal bankruptcy. There are certain criteria that need to be met before someone can declare bankruptcy. To determine if you are eligible to declare bankruptcy in Canada, ask yourself the following 4 questions.
- Have you lived in Canada for at least one year, conducted your business in Canada over the last year, or owned the majority of your property in Canada?
- Do you owe $1,000 or more?
- Are you absolutely unable to pay your debt repayment amounts when they are due?
- Do you not have sufficient assets to convert into cash to pay off your debts?
Length of Bankruptcy
The amount of time you will be in bankruptcy differs person-by-person. The minimum length of bankruptcy as determined by Canadian legislation is 9 months, but this only applies to consumers who have never filed for bankruptcy before. Only consumers who accurate complete all of their responsibilities as outline by their repayment plan can be discharged from bankruptcy, so bankruptcy proceedings will last as long as it takes for the consumer to complete these obligations.
Even once you have been discharged from bankruptcy, the effects of bankruptcy will last longer than the proceedings did. A note will appear on your credit score for at least 6 years after you are discharged from bankruptcy in order to let potential lenders know that you have had troubles repaying your debts in the past. The length of time this note appears on your credit report can vary depending on whether or not you have declared bankruptcy in the past.
If you are considering filing for bankruptcy, there are some legal terms that you will need to know. Common terms that you will encounter during bankruptcy proceedings include:
- Licensed Insolvency Trustee (LIT)
An LIT is a professional licensed by the Office of The Superintendent of Bankruptcy to deal directly with creditors on your behalf and to oversee your repayment plan, receive payments, and distribute them to your creditors.
- Credit Counseling
Before you can file for bankruptcy, the courts will require you to undergo credit counseling, which is where you will meet with your LIT to discuss healthy financial practices.
- Discharged Bankruptcy
Once you have met all the obligations of your repayment plan and bankruptcy proceedings have been completed, your bankruptcy will be considered discharged.
- Exempt Property
While in bankruptcy, you are required to liquidate most of your assets to pay off your debts. However, there are certain assets that are considered exempt property, meaning you do not need to surrender these items. Exempt property is determined on a provincial level but often includes items you need in order to perform your job, such as tools or specific clothing.
Liquidation is simply the sale of your non-exempt property, where the cash from the sale goes to your bankruptcy repayment plan.
- Secured Debt
Secured debt is often backed by collateral, meaning the creditor has the right to seize an asset if you default on your loan. Secured debts are often your house if you have a mortgage or your car if you have an auto loan.
- Unsecured Debt
The opposite of secured debt, unsecured debt means that there is no physical collateral that the creditor can seize if you default on your payments, such as a credit card or line of credit.
- Reaffirmed Debt
During bankruptcy proceedings, you can potentially negotiate with the creditor of a secured debt to keep the collateral if their debt is reaffirmed, meaning that you agree to continue paying back that debt instead of having it discharged.
Types of Debt That Can’t Be Forgiven
Bankruptcy is intended to help borrowers who cannot repay their debts by eliminating some of it, but there are some types of debt that cannot be forgiven during bankruptcy filing.
- Outstanding alimony and child support payments
- Reaffirmed debts
- Tickets and fines issued by the court
- Student loans (if you were in school less than 7 years ago)
- Any debt arising from fraud
Consequences of Filing for Bankruptcy
While rules can vary slightly by province, there are two main consequences all consumers face when filing for bankruptcy.
As you may have already heard, one large consequence of filing for bankruptcy is that you will lose your non-exempt assets.
Probably the most well-known consequence, you will lose your non-exempt assets in order to repay creditors. While you are allowed to keep basic household items such as clothes and personal items, you may be required to liquidate most of your valuable assets to repay creditors. This can be your vehicle if you do not have an auto loan, the equity invested into your house, and antique furniture. These are only some of the large ticket items that you may be required to liquidate and by no means is an extensive list.
A lesser-known consequence of bankruptcy is the damage it can have on your credit. As previously mentioned, a note will appear on your credit report for at least 6 years once you have been discharged, which is visible to all of your potential lenders. Creditors are less likely to lend you money if you have declared bankruptcy in the past because it means that you have had trouble repaying what you owe. This can make it difficult to obtain financing, whether you are applying for a credit card, trying to get approved for a mortgage, or attempting to obtain financing for a new vehicle.
Alternatives to Bankruptcy
If you are hesitant to pursue bankruptcy because of the negative effects it might have on your current standard of living or your future financial decisions, there are other debt-free solutions that you can consider.
- Consumer Proposal – a formal settlement of what you owe to your creditors, managed by a LIT, that will eliminate a percentage of the original debt owed to the point where you can actually afford to pay your remaining debt.
- Debt Consolidation – consolidating all your debt into one bank consolidation loan to make monthly payments easier while enjoying a lower interest rate to make it easier to pay your monthly minimums.
- Credit Counselling – the first step towards financial stability as it will examine your finances and help you make sense of your purchasing habits so you can find ways to save money and pay off your debts.
Where to Start
Whether you want to pursue bankruptcy or learn how another debt-free solution might impact your current debt situation, take the first step towards a financially sound future by speaking with a LIT.
The LIT at Blanchard & Co is here to help you achieve financial freedom, regardless of your current financial situation. Their friendly staff is standing by and ready to welcome you to their judgement-free and safe space.