Debt is something that most people will encounter and have to deal with at some point in their lives. Whether you are getting student loans for university, need a car loan for a new vehicle, or need to secure a mortgage to get your first home, having debt is inevitable.
Most of the time, having debt is no big deal as long as you are aware of the cost, can handle the debt, and make timely payments. However, there are times where debt can get the better of us and we find ourselves drowning in it. In some extreme cases, debt coupled with various financial issues might be too difficult to handle alone and you might need to look for assistance.
There are many different types of debt relief options available, each with its own benefits and drawbacks. But, sometimes, if your situation calls for it, filing for bankruptcy is the best (and potentially only) option for you, so it is important you are aware of how it works.
What is the Process of Filing for Bankruptcy in Canada?
Before looking at how much it costs and what the main sources of that cost are, we will first take a closer look at the actual process of declaring and filing for bankruptcy in Canada.
Step 1: Meet With a Licensed Insolvency Trustee
Discussing your financial situation with a Licensed Insolvency Trustee is one of the first steps you should take when considering bankruptcy. These are the only professionals who are legally allowed to handle bankruptcies. They will provide all the information you need, ensure you are treated fairly and will be there for you during the entire process. Your city should likely have at least a few of these individuals, so simply choose the one you feel the most comfortable and confident with.
Once you choose a LIT, you and your trustee will have to meet and do a final review of your options to ensure that bankruptcy is the right move for you. After reviewing your finances, expenses, debts, and assets, they will give you their recommendation. Of course, the final choice of what to do is always up to you.
Step 2: Filing For Bankruptcy
Once you decide to proceed with the bankruptcy filing, your trustee will give you a form to fill out. You will need to provide all of your personal information, a list of all your creditors and debts, and then a list of all of your assets. Once they have that, the initial paperwork will be filled and once you sign the forms, your bankruptcy will officially begin.
From that point on, any wage garnishments or lawsuits from creditors will stop. You also will not have to make any more payments to your creditors. During the bankruptcy process, your LIT will evaluate your assets and sell any items that aren’t exempted by provincial and federal laws. The proceeds will then be used to pay off your debts (as much as possible). Your LIT will also evaluate your income in order to determine if you need to make any surplus income payments. These payments will be used to further pay off your creditors.
Step 3: Informing Your Creditors
From there, your trustee will send copies of the paperwork to your creditors so they will be able to file their claims. In some instances, your creditors may hold a meeting which you must attend, to obtain more information about the bankruptcy, to give direction to your LIT and to watch over the administration of your estate.
Step 4: Your Obligations
During your bankruptcy, you will have certain obligations to adhere to which include attending credit counselling and providing a monthly income statement. Your bankruptcy should be discharged within 9 months or so and once it is, your debts will be cleared. A bankruptcy will stay on your credit report for at least 7 years, so getting your credit back in check after a bankruptcy can be a long process, but is worth it in the long run.
Recently declared bankruptcy? Learn how you can rebuild your credit.
The Three Main Costs of Bankruptcy and How Much Bankruptcy Costs
No matter which trustee you go with there are certain fees set by the government that you’ll need to pay. However, the overall costs of bankruptcy will depend on how much you make, how big your family is, your assets and more.
In total, there are three main costs associated with bankruptcy and they are:
In Canada, the minimum cost for filing for bankruptcy is $1,800. This can be paid at once or in $200 installments over 9 months. This fee is used to cover certain costs like administration fees, your LIT, government fees, and more.
Surplus income payments are calculated using the income limits created by the Office of the Superintendent of Bankruptcy. To calculate your surplus income payment simply take the difference between your income and the income limit and then divide it by two. If your surplus income payment is less than $200, you can be discharged from bankruptcy after 9 months. All you’ll need to pay is the base contribution mentioned above.
However, surplus income payments are required if your surplus income payment is more than $200. Moreover, if it is, your bankruptcy (and the associated payments) will be extended for another year (9 months to 21 months). This basically means that those who make a lot of money will generally have to pay more for their bankruptcy than those who are barely scraping by.
For example, if you’re a family of 3 with an income of $4,000, you’ll be making $567 more than the income limit of $3,433. Your surplus income payment is would be $283.5. Since your surplus income payment is more than $200, you’ll have to make these payments for 21 months instead of the base contribution for 9 months.
Learn to calculate your bankruptcy payments.
Assets You Lose
Of course, another huge cost in your bankruptcy will be the assets you lose. You will not only lose your tax return for the year of filing (and any others that haven’t been received yet) and all of your RRSP contributions of the last 12 months, but also all of your investments. Also, you can potentially lose the equity in your home and your vehicle but that depends on which province you live in and the individual rules for that area.
Alternatives to Bankruptcy
As we mentioned briefly in the introduction of this article, there are many different options for debt relief in Canada, so don’t just assume you have to declare bankruptcy. Some common alternatives to consider are:
- Consumer proposal – A consumer proposal is a legally binding agreement between you and your creditors to arrange for a partial repayment of your debts. Unlike a bankruptcy, your assets aren’t at risk and the effect on your credit score is not as large.
- Debt Management Program (DMP) – A DMP is a debt relief program you can undertake by speaking to a credit counsellor. Your credit counsellor will work to reduce your debt’s interest rate, fees, monthly payment amount (by extending the loan term) and sometimes the balance itself. This program also allows you to consolidate your debts by making a single payment to your credit counsellor who will then distribute the payments to your creditors.
- Debt Settlement – A debt settlement involves clearing your debt for less than what you owe. For example, your creditor may clear your debt for a lump sum payment of $5,000 even if you owe $8,000. This can be done by calling and negotiating with your creditors or by hiring a debt settlement company.
Frequently Asked Questions
Do I need to make surplus income payments?
How long do I need to make bankruptcy payments?
Dealing with bankruptcy is never fun, but being prepared and knowing what to expect can soften the blow and make the entire process easier to handle and go through. Do keep in mind, that bankruptcy is an extreme debt relief solution and should only be used as a last resort. There are many alternatives to get a handle on your debts, so be sure to consider them all before a bankruptcy.