Bankruptcy
How it works
The first step toward bankruptcy is to book an appointment to speak with a Licensed Insolvency Trustee (LIT). During the appointment, the Trustee will obtain information on your current financial situation, including your income, assets, current expenses, the type of debt you have and how much you owe. This information will be used by the Trustee to assess your level of insolvency (inability to pay your debts) and eligibility for bankruptcy.
How does my income affect my bankruptcy filing?
When filing for bankruptcy, your income will also be compared to the "income threshold amount" set by the Canadian government. This threshold is the amount of income that the federal government has determined is needed to maintain a reasonable standard of living, based on the size of your family or if you live alone. Any income that exceeds this threshold is considered to be surplus income. If you have any surplus income, you will be required to pay 50% of it to the bankruptcy trustee, so that it can be distributed amongst your creditors.
Will I lose all of my assets if I file bankruptcy?
A common misconception of bankruptcy is that you will automatically lose all of your assets. This is often not the case, and depends on the equity you have in assets such as your home and vehicle (current value minus amount owed). For example, if you finance or own a vehicle and all of the payments are up-to-date, you can choose to keep the vehicle. However, you may be required to pay any equity in the vehicle (the value of the vehicle minus the amount you owe on it) minus the provincially exempt amount. Take the scenario below:
If your vehicle is worth $25,000 and you still owe $15,000, then the equity would be $10,000. Now, if your province allows you to keep $3,000 of equity in your vehicle, then you would be required to pay the remaining $7,000 to the bankruptcy if you wanted to keep your vehicle ($10,000 equity - $3,000 provincial exemption = $7,000 non-exempt equity).
Provincial legislation will determine how much equity you can keep in assets such as your home and vehicle, before being required to pay any additional equity or having to surrender it. Therefore, if the equity in your home is much higher than the debts you owe, then bankruptcy may not be a viable solution.
The trustee will explain to you which of your assets must be surrendered and which ones can be kept. The value of any assets that are surrendered in a bankruptcy will be used to pay back your creditors.
Will it stop legal action from my creditors?
Upon filing for bankruptcy, a stay of proceedings is immediately put into effect. This means that any collection calls, wage garnishments, seizures, liens or legal action against you must be stopped by creditors right away.
How long will I have to wait before my bankruptcy is discharged?
The length of your bankruptcy is determined by whether you have to pay any surplus income, and whether you have filed for bankruptcy in the past. If it is the first time you are filing, and you do not have to make any surplus income payments, you may be discharged from your bankruptcy in as early as nine months.
If you do have to make surplus income payments on a first-time bankruptcy, you will have to make payments for at least 21 months before discharge. If it is your second time filing for bankruptcy, you will not be eligible for discharge for at least 24 to 36 months, depending on whether or not you need to make surplus income payments. If it is your third time filing for bankruptcy, you will need to have a discharge hearing in court before being considered for discharge.
It is important to remember that your debts are NOT ELIMINATED until all of the bankruptcy requirements have been met, and your bankruptcy has been DISCHARGED. If you do not obtain a bankruptcy discharge, you will still be responsible for all of your debt.
Beware of paying unnecessary fees
There are some companies that will offer to complete the paperwork for you to file bankruptcy, in exchange for a fee of hundreds of dollars. The company or agency will then send your documents to a Licensed Insolvency Trustee who will process your bankruptcy filing, as they cannot do it themselves. Unfortunately, the Licensed Insolvency Trustee will still charge you their usual filing fee, which covers filling out the same paperwork. Having an outside agency complete your documents will NOT increase your chances of having your bankruptcy accepted. Avoid paying unnecessary fees to these agencies just for a referral. You can find a Licensed Insolvency Trustee on your own through a simple internet search or DebtAnswers Canada can put you in touch with one, free of charge.
Impact on credit rating
You will receive an R9 credit rating for the duration of the bankruptcy, plus six years after the discharge. This can be extended for up to 14 years after the discharge if you have already filed for bankruptcy in the past.
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With a bankruptcy, your debts are eliminated so that you are no longer responsible to pay them. This can be a huge relief if you have been struggling to come up with monthly debt payments, or if you are facing unrealistic time frames, such as ten years or more to pay back your debts.