Are you experiencing serious financial issues and thinking about bankruptcy? Please note that filing a bankruptcy is not right for everyone. Below are some common myths and facts about it:
Fact: There are debts not included in bankruptcy. Secured debts, child support or alimony, student loans, court fines and any debts related to fraud you would still be responsible for if you file for bankruptcy.
Fact: You will still have to pay for secured debt such as a mortgage and such things as child support. A bankruptcy also costs money to file. The fees associated with filing a bankruptcy vary. The min amount for a first-time bankruptcy is $1,800, payable over the term of the bankruptcy. More money may be payable depending on asset values, income, and the number of previously filed bankruptcies.
Fact: You must be insolvent under the terms of the Bankruptcy and Insolvency Act of Canada to file a Bankruptcy. To find whether someone is insolvent, the following criteria is used:
Answering ‘yes’ to one of the above does not automatically make you insolvent. For instance, you may have difficulty paying your monthly obligations due to cash flow issues yet own a property worth more than the debt owed.
Fact: With bankruptcy, the law requires you to use equity to pay off some of what you owe to your creditors. If you declare bankruptcy while your house is worth more than $10,000 above the mortgage (after deducting selling costs) and you want to keep your home, you will need to pay the bankruptcy trustee the equivalent of any equity value in your home.
Your Licensed Insolvency Trustee will advise you to get an appraisal on your house as part of the assessment process to determine just how much equity there might be. If you can afford to ‘buy out’ this equity, bankruptcy can still be a solution to eliminating your other debts.
Fact: Declaring bankruptcy is not an easy way to get out of your financial problems. Bankruptcy gives you a negative credit score that lasts for years, which makes it harder to rebuild credit and secure your financial future.
Fact: There are alternatives to bankruptcy which includes debt management programs, informal consumer settlement proposals, refinancing your home and debt consolidation options. The right solution will depend on an individual’s specific situation.
Fact: Quickly making a few large purchases to max out credit cards and then declaring bankruptcy will jeopardize working with a bankruptcy trustee and/or being discharged from the bankruptcy process. Creditors may also oppose a person’s application to be discharged from their bankruptcy, leaving them in a difficult situation. Your trustee and your creditors play a vital role in helping you obtain your discharge.
Canadian bankruptcy laws are designed to provide legal protection for people in severe financial hardship and to give them an opportunity for a fresh start. Bankruptcy should always be considered last resort.
When you’re struggling with unmanageable debt, bankruptcy is just one solution; there are others to consider. Most will also affect your credit, but probably not as badly as a bankruptcy — plus, these alternatives can allow you to keep your property, rather than having to liquidate it in bankruptcy proceedings.
1. Seek help from a government-approved credit counselor or debt management plan. A counselor can work with your creditors to help arrange a workable plan for repaying what you owe.
2. Take out a debt consolidation loan. These types of loans can aggregate multiple high-interest, costlier debt into a single, lower-interest loan. Research debt consolidation loans to see if consolidation can lower the total amount you pay and make your debt more manageable.
3. Approach your creditors and see if they are willing to agree to a more manageable repayment plan. Defaulting on your debt is not something your creditors want to see happen to you, either, so they may be willing to work with you to arrange a more achievable repayment plan. Settling your debt will have a negative effect on your credit scores.
4. Consumer proposal. A consumer proposal is a formal agreement between you and your creditors. It is administered by a Licensed Insolvency Trustee, who help you negotiate the terms of your debt repayment. The main difference between consumer proposals and personal bankruptcy is that a consumer proposal allows you to keep more of your assets, has less of an effect on your credit score and will stay on your record for 3 years instead of 6 years for a first-time bankruptcy.
Be aware that whenever you fail to honor the debt-repayment terms you originally agreed to, it can affect your credit. That said, bankruptcy will still have a more significant negative impact on your credit than will credit negotiation, credit counseling and debt consolidation. Before you make any decision about debt relief, such as declaring bankruptcy, it’s important to research your options, get reliable advice from a qualified credit counselor, and understand the impact your choices can have on your overall financial well-being.
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.