The last resort, for consumers in Vancouver who are unable to keep up with their debts, is bankruptcy. Usually, bankruptcy should only be considered after all other options have been exhausted. The thing is, debt issues happen and when they get so bad that there are no other options left to consider, bankruptcy might be the only route left to take.
What is Bankruptcy?
Bankruptcy in Canada is federally governed by the Bankruptcy and Insolvency Act (more here). It basically means that you surrender everything that you own to a licensed insolvency trustee to eliminate your debt.
In Vancouver, there are certain exceptions to the assets that you can keep, which include:
- Medical and dental aids
- Furniture up to $4,000 in value
- Pets up to a value of $2,000
- One vehicle up to $5,000 in equity
- Primary residence up to $12,000 in equity
- Personal property required for business up to $10,000 in value
- Injury compensation funds
- Equity in your home up to $50,000
- Most RRSPs and pensions
- Life Insurance Policy Cash Surrender Value
Bankruptcy provides you with relief from your debts while treating your creditors fairly.
Is bankruptcy the right choice for your tax debt? Find out here.
When is Bankruptcy the Right Choice?
As already mentioned, bankruptcy is a last resort. That said, there are certain situations where bankruptcy might be the right choice to make:
- If you can’t keep up with your debt payments
- If you’ve defaulted on your all your loans
- If you can’t earn any more money
- If you’ve tried all other debt relief options
- If a licensed insolvency trustee thinks it’s the best option for you
How Will Bankruptcy Affect Your Credit Score?
Obviously, bankruptcy is not good for your credit. More specifically, your credit report will be reported with an R9 rating, which can stay on your report for as long as 10 years. Only after you’ve been discharged from your bankruptcy (which can take a few months or longer) will you be able to start repairing your credit.
A first-time bankruptcy will stay on your credit report for six years after being discharged, which means if you’re bankrupt for the minimum period of 9 months, bankruptcy will stay on your credit report for almost seven years in total. A second bankruptcy, on the other hand, can stay on your credit report for 14 years.
Interested in more information about your credit score? Click here.
How to Repair Your Credit After Bankruptcy
It can be tough to climb back from bankruptcy, especially considering how much it affects your credit and how long this note stays on your credit report. That said, there are still things you can do right now to repair your credit after bankruptcy, including the following.
Pay your bills on time. Now is not the time to flake out on your bill payments. You’re probably in the position that you’re in mainly because of your failure to make timely payments in the past. Now, it’s essential that you make payments on time and in full in order to improve your credit score.
Pull a copy of your credit report. Once a year, you should pull a copy of your credit report. Not only will this show you where you stand with your credit, but it will also give you the opportunity to see if there are any mistakes that should be rectified. If so, have them fixed by the credit bureaus, which could help to inch your score back up a bit.
Spend less and save more. Another reason why you may have found yourself in the position of filing for bankruptcy is that your spending habits may have been out of control. In order to improve your credit score, try spending much less than you were before. Don’t rack up your credit card bills too high.
While you’re at it, start saving more money. This will help you have enough money as a financial cushion to be used on a rainy day.
Apply for a secured credit card. To start rebuilding good credit, apply for a secured credit card. This is easy to get approved for even after bankruptcy because it involves making a cash deposit before you’re allowed to use it. By making timely payments on your secured card, your credit score will slowly go up.
What Happens to Your Debt When You File For Bankruptcy?
The purpose of bankruptcy is to seek relief from your creditors who may be hounding you to pay off all your debt. Bankruptcy can help discharge a lot of debt, but there are some exceptions to the rule.
Generally speaking, bankruptcy only discharges unsecured debts, such as conventional credit card debt. That’s because the creditor of a secured debt has a certain right to the asset involved. For instance, if your mortgaged asset (your home) is worth more than what you still owe on your mortgage, any remaining equity will have to be surrendered.
Debts that may be eliminated include:
- Credit card balances
- Unsecured lines of credit
- Unsecured personal loans
- Income tax arrears
- Unpaid utility bills
- Overdue insurance premiums
- Retail store accounts
- Payday loans
- Medical bills
Debts that can’t be eliminated include:
- Child support
- Spousal support
- Student loans less than 10 years old
- Court ordered restitution payments
- Court awarded damages
- Debts as a result of theft or fraud
- Certain government overpayments
- Secured debt like mortgages
How Much Does it Cost to File for Bankruptcy in Vancouver?
When you file for bankruptcy in Vancouver, you’re trying to alleviate debt, not pile more on. However, like most other debt programs, bankruptcy comes with a cost. The amount you end up paying will depend on a variety of factors.
Base contribution. Everyone must pay the base contribution, which covers the costs of administering your estate. No matter what your debt situation was like when you filed for bankruptcy, you will need to pay a base contribution just like anyone else. This fee usually costs around $200 per month.
Surplus income. If your monthly income is more than what’s considered “surplus income,” you will need to pay that excess amount. Your threshold will be determined before your first payment is made. If your monthly income is more than $200 over the limit over the first seven months after filing for bankruptcy, on average, your bankruptcy will be extended by one year.
Check out the 2018 bankruptcy surplus income limits, click here.
Assets lost. The value of any assets that you surrender will need to be factored into the cost of your bankruptcy, for obvious reasons. Anything that is not included on the exemption list will likely be lost.
On average, most people who file for bankruptcy will pay about $1,800 in total. That said, the overall costs will depend on your income, your assets, and the size of your family.
What Other Options Do You Have Besides Bankruptcy?
As already mentioned, bankruptcy is a last resort after all other options have been explored. Before filing, be sure to see if any of the following options are viable for your situation:
- Debt consolidation loan – This involves taking out one large loan to pay off all other smaller, high-interest loans you may have and are responsible for making payments toward. It can help you manage your debt better and pay it down faster.
- Debt settlement program. Companies involved in this type of service will negotiate with your creditors on your behalf to reduce the amount of debt you owe. Alternatively, the interest rate charged can also be reduced in order to make your debt load less expensive and easier to pay off.
- Consumer proposal. This arrangement involves submitting a proposal to your creditors to have your debt forgiven after you promise to pay a portion of what you currently owe.
Do you know what the true cost of borrowing is? Check out this infographic.
What’s the Difference Between Bankruptcy vs. Consumer Proposal?
The following are the main differences between bankruptcy and consumer proposals:
Assets. In bankruptcy, you can expect to have to give up many of your valuable assets, whereas consumer proposals don’t require such sacrifice.
Affect on your credit. The effects of bankruptcy on your credit score are typically worse. You’ll be rated with an R9 with bankruptcy, which is the worst credit rating on a credit report. A consumer proposal will leave you with an R7 rating, which is not good, but not as bad as bankruptcy. Also, bankruptcy will stay longer on your credit report, especially if you’ve filed multiple times.
Cost. Bankruptcy payments are based on your income. The more you make, the more money you’ll have to pay. The cost of a consumer proposal is based on the settlement negotiated between you and your creditors. When a proposal amount is agreed upon, a monthly payment will be arranged and will stay the same until your consumer proposal is complete.
Is Bankruptcy Right For You?
If you’re drowning in debt and are struggling to keep up, there may be options for you to look into. Bankruptcy is always an option, but it should never be your first consideration. Before you decide to file for bankruptcy, speak with an associate from Loans Canada to find out which option is best for you.