Bankruptcy; this is the first thought for many individuals that are desperate to fix their financial situation. Although the majority of Canadian’s have heard the word “bankruptcy” before, many are unaware of what the bankruptcy process really entails. Because of this lack of information and these misconceptions haunting bankruptcy, we wanted to provide individuals with the reality of declaring personal bankruptcy in Canada.
1. I will lose everything I own if I file for bankruptcy
This is one of the biggest misconceptions when filling for personal bankruptcy. The purpose of bankruptcy is not to take away everything you own, but to allow you a fair standard of living while still maintaining fairness to your creditors. To ensure that a fair standard of living is kept, the federal bankruptcy laws allow each province to set their own exemption amounts for certain assets that are exempt from seizure for the benefit of your creditors. In BC the current exemptions are as follows:
- $9,000 in equity for your principle residence;
- $4,000 worth of household items;
- $5,000 of equity in a motor vehicle (which is reduced to $2,000 if support payments are owed);
- $10,000 of equity in tools used to earn income;
- Unlimited equity in essential clothing and medical aides;
- RRSP’s, RRIF’s, and DPSP’s. (Note: any contributions within 12 months prior to the date of bankruptcy will be realized upon by the trustee for the general benefit of your creditor’s) and;
- Certain life insurance policies.
2. Bankruptcy is my only option when facing financial turmoil
There are many alternatives to bankruptcy depending upon the extent of your financial hardships. Some alternative to filing for personal bankruptcy include debt management programs, informal debt settlement proposals, consolidation loans or a consumer proposal. The right solution for one may not be the right solution for another; in order to determine how to best remedy your finances, it is a good idea to contact a Licensed Trustee. Most trustee offices will offer a free initial assessment and consultation.
3. Only poor people go bankrupt
Firstly, you need to understand that financial hardships can affect anyone at any time. An unexpected event such as a divorce, the death of a spouse/partner, health problems, disabilities or even adverse changes to your employment can turn a well-intentioned individual’s financial situation upside down. In order for one to qualify to file for personal bankruptcy, they must owe at least $1,000 and be either unable to meet required payments as they fall due, or owns insufficient assets to repay their debts.
4. My credit rating will be ruined & I will never be able to get credit again
Chances are that if you are considering personal bankruptcy and are missing required payments to your creditors, you already have a less than perfect credit rating. When filing for bankruptcy you will receive a R9 rating on your credit report which will stay on your report for a number of years. While this does provide negative points to your credit rating, it shows you have taken the initiative to deal with your finances. Provided that you have income, you can start to rebuild your credit upon the discharge of your bankruptcy. The bankruptcy process includes two financial counselling sessions where obtaining future credit is addressed.
5. Filing for bankruptcy will affect my spouse/partner’s credit rating
In most cases, filing for personal bankruptcy will only affect the credit rating of that individual. With that in mind, if your spouse/partner has co-signed or guaranteed any of your debts, they will be responsible to repay the full amount owing. A creditor can only collect debts from the individual(s) indicated on the loan agreement, despite their marital situation. If you have co-signed debt and are considering personal bankruptcy, it is a good idea to speak with a Licensed Trustee in Bankruptcy to discuss the particulars of your situation.
6. Bankruptcy will relieve all of my debts
Depending on your specific situation, some of your debts may not be discharged by bankruptcy. Section 178 of the Bankruptcy and Insolvency Act sets out what debts will and will not be discharged by filing for personal bankruptcy. These debts include and are not limited to any awards for damages as a result of assault or debts from fraud, court imposed fines/penalties, , alimony, child or spousal support and student loan debt (if the bankruptcy occurs during attendance or within 7 years of the last day of attendance). Most income tax debt will be discharged by a bankruptcy.
Please feel free to contact our office to set up a no cost initial assessments to discuss the specifics of your situation.