Many Canadians across the country struggle with debts of all kinds. Some people can manage the small amounts of debt they have, while others accumulate so much that they simply can’t deal with it. Thankfully, Canada is home to many different debt relief options.
Many of these options will help you pay off your debt, negotiate a lower rate, or simply make you more educated in the realm of finance. However, in extreme cases, the most common debt relief options might not be enough. In these situations, an individual will need to consider bankruptcy. While some people have a basic understanding of what bankruptcy is, most do not know the full story.
In an effort to educate you and find the debt relief assistance you need, this article will not only examine what bankruptcy is, as well as the process and costs involved but will also clarify what debts and assets are exempt from a bankruptcy filing in Canada.
What Is Bankruptcy?
The process of bankruptcy is established to help people who have no possibility of getting out of debt and therefore need assistance. When filing for bankruptcy, you will have to hire a licensed insolvency trustee, who will work with you in order to eliminate your debts. As long as your debts are more than $1,000, you can technically file for bankruptcy, according to the Bankruptcy and Insolvency Act of 1985, which governs bankruptcy and insolvency in Canada.
Does filing for bankruptcy affect your spouse? Find out here.
There are many pros and cons that go along with filing for bankruptcy. In terms of pros, the biggest is that you get to start over financially and will no longer be in debt (in most cases). Also, it is impossible to file for bankruptcy without first agreeing to participate in financial counselling. This program will help you become more educated and hopefully, you will be able to avoid the same situation in the future.
Trying to decide if you need credit counselling? Read this.
However, there are also many negative aspects of bankruptcy that you should consider before you decide to file. The first is that your credit will suffer for around 7 years for your first bankruptcy and 14 years for your second. This means it will be very difficult to get a mortgage, take out new loans, or participate in other financial situations that utilize your credit report or credit score. It can be a long journey to get your credit back to a suitable level. Also, bankruptcy will often force you to surrender certain amounts of equity in your home, vehicle, household items, and tools. Further below, we will take a look at certain bankruptcy exemptions (assets that you will keep ownership of when you file for bankruptcy).
Recently filed for bankruptcy? Click here to learn how you can rebuild your credit.
What Does Bankruptcy Cost?
Most people will pay a minimum of $1,800 for their bankruptcy. This can, of course, be paid all at once or over 9 months, at $200 per month. The fees are set by the government and will be the same no matter which trustee you go with. However, the overall costs of bankruptcy will depend on what your regular income is, how big your family is, your assets, and more.
In total, there are three main costs associated with bankruptcy, which are the base contribution, surplus income, and of course, the costs of the assets you might lose. The base contribution is the $1,800 we mentioned above, the assets you lose is fairly self-explanatory, but the “surplus income” cost can be confusing.
If your income is above the bankruptcy surplus income limits threshold set by the government, you must make what are called “surplus income payments”. This means that those who make a lot of money will, more often than not, have to pay more for their bankruptcy than those who have a lower income.
How Does the Bankruptcy Process Work?
The idea of filing for bankruptcy can be a bit intimidating, but that shouldn’t stop you from doing it if you (and your counsellor) have decided that it’s the best choice for you. However, knowing a bit about the process and what to expect can make it a little bit less frightening.
The first step is to find a licensed insolvency trustee who will help you with your bankruptcy. There is a good chance that there are numerous organizations who offer such services in your city or in the surrounding area.
Is insolvency in your future? Click here to find out.
The trustee should likely be a local and you should feel comfortable working with them. You will be working closely with these people for a while, so make sure you feel confident they are the right choice. These trustees will provide you all the information you need to know and you can ask them any questions you have about the process of bankruptcies, costs, or anything else that comes to mind.
Before you can file for bankruptcy, you will need to provide your trustee with a variety of personal information, including your name, address, birth date, assets and creditors/debts. This will help them get an inside look at your financial situation. The entire process of bankruptcy should last no more than nine months. If you stick by the agreement throughout those months, your trustee will recommend a discharge, which will completely free you from your most of your debts.
What Debts Can and Cannot be Discharged?
While most people believe that bankruptcy gets rid of all of your debts, that isn’t actually the case. There are a few debts that cannot be discharged, even if you file for bankruptcy. These include secured loans/liens, child support and alimony, student loan debt (unless you can prove that you’ll never be able to pay it), traffic tickets, other legal fines, and of course, debts you forgot to list in your bankruptcy papers.
On the other hand, bankruptcy will get rid of most debts that you will find yourself in, such as credit card debt and other unsecured debt. In addition to that, bankruptcy will ensure that your creditors stop harassing you. Even certain liens can be eliminated due to a bankruptcy, but that will depend.
Read this to discover the differences between secured and unsecured debt.
Unfortunately, as you can see, there are many types of debts that bankruptcy cannot help you with. So, if you expected it to give you a 100% clean slate no matter what, that might not actually be the case.
Before you file for bankruptcy, make sure to consider your other options.
What Assets Are Bankruptcy Exemptions?
Many people might think you lose all of your assets when you file for bankruptcy, but that’s not totally true. Bankruptcy does involve you surrendering your assets to the trustee, who then turns them into cash, which they use to pay your creditors. However, it would be inhumane to take absolutely everything a person owns during their bankruptcy. So, there are certain essential assets (or bankruptcy exemptions) that won’t be taken away from you once you file for bankruptcy.
Limited amounts of the following items are considered “essential”:
- Food
- Clothing
- Furniture
- Vehicles
- Tools
- Property
- Principal residence
- Sentimental items
- Others (each province has some of their own rules and inclusions here).
However, don’t get your hopes up too much; there are limits to all of these exemptions. The limits will depend on your financial situation and where you live. Speaking to an insolvency trustee about your situation is imperative so that you’ll know exactly what you can keep and what would be lost.
Will you lose your RRSPs if you declare bankruptcy? Click here to know more.
Final Thoughts
There are indeed some debts that do not go away when you file for bankruptcy, and there are some assets of yours that will be exempt during the bankruptcy process.
However, the rules and regulations will differ from province to province and can be incredibly difficult to understand (and change frequently), so you definitely want to contact a professional in your area for more information. This way, you will know exactly what debts can be discharged and what the bankruptcy exemptions are in your area. We hope that this article has helped you to better understand (and feel more comfortable about) bankruptcy and its various intricacies.
