An Overview of What A Bankruptcy Is And How It Works
A Bankruptcy is a legal process which provides a debtor (who is unable to meet his or her financial commitments to their unsecured creditors) with a process for eliminating his or her debts in an orderly manner. The process is governed by the Canadian Bankruptcy and Insolvency Act. People who use a Bankruptcy are in essence declaring to their creditors that they are unable to pay off their debts when they become due. This arises either because the debtor has insufficient income or assets (that are not secured) to meet these obligations.
Which Debts Can Be Included In A Bankruptcy?
The types of debts that are covered in a Bankruptcy are unsecured debts. These debts include:
- Credit card debts
- Store credit cards
- Bank loans and unsecured lines of credit
- Amounts owing to suppliers for utilities and hydro
- Unpaid income tax debt.
- Student loans (only if you have been out of school completely for at least seven years)
- Other unsecured debts
Debts That Don't Qualify For A Bankruptcy
There are some debts that cannot be eliminated through a Bankruptcy. These include:
- Child support payments
- Alimony payments
- Student loans that are less than seven years old, and
- Any debt incurred in a fraudulent manner
In addition, secured creditors remain outside the bankruptcy process. They usually have a lien on your property: if you stop paying, they have the right to seize your property and sell it to recover the amount owing to them. These debts include mortgages and automobile loans.
Whether a bankruptcy is the right debt solution for you depends on your circumstances. Other options will always be evaluated first, but if you have no income (or income that falls below the government prescribed minimum), and no equity in any assets (like a house or car), then bankruptcy may be a practical option to get out of debt. If it is, then it is the surest way for you to clean up your debts and start fresh to rebuild your financial life.
The Main Aspects Of A Bankruptcy
In summary, the main aspects of a bankruptcy are:
- Once you file for a bankruptcy, you immediately get protection from your creditors.
- From that point onwards, no unsecured creditor can garnishe your wages, or initiate any other collection action against you.
- Your Insolvency Trustee deals with all further communications with your unsecured creditors.
- You will attend two counselling sessions which help educate you on how to budget effectively, how to avoid these types of problems in the future, as well as information to help you get an understanding of your credit score so you can begin to rebuild it.
- If you are filing a bankruptcy for the first time, it normally lasts between 9 and 21 months.
- At the end of the process when you are discharged, you are legally relieved of any obligation to repay those debts. You can start life again debt free.
- A bankruptcy in Canada can only be filed through a Licensed Insolvency Trustee, an individual licensed by the Office of the Superintendent of Bankruptcy (OSB) to administer the bankruptcy process. This assures you that the Insolvency Trustee you are working with is professionally trained and reliable, as they are closely monitored by the government on an ongoing basis.
The Bankruptcy Process
If, after your consultation with an Insolvency Trustee, you decide that filing for bankruptcy is the right option for you, your Trustee will assist you in completing all of the required forms. These forms can now be submitted electronically. Your debts will be frozen at this point, meaning that they do not accrue any interest.
You will also receive legal protection at this point. All civil legal action against you to collect on your unsecured debts will stop as will many wage garnishments. In addition, your creditors will not be able to contact you or take any action to collect their debts. This means that harassing calls from creditors and collection agencies will stop.
Your trustee will deal with your assets, ensuring that you are able to keep all exempt assets.
Bankruptcy and your Assets
One major concern that many people have is what happens to your assets when you file for bankruptcy. A lot of people incorrectly believe that you lose everything you own during bankruptcy. This is not true. The goal of bankruptcy is not to punish you and leave you with nothing. Each province in Canada allows you to keep certain assets that are considered necessary for living a basic lifestyle. Your trustee will review your assets and make sure that you are able to keep those that are exempt.
RRSP contributions made in the last 12 months can be lost by filing for bankruptcy. However, contributions made more than 12 months ago are exempt. Pension plans that are “locked in” until retirement are also exempt as are life insurance policies that have a preferred beneficiary listed.
Every financial situation is different. In order to determine how your particular assets could be affected by filing for bankruptcy, you will need to speak with a Trustee who has reviewed your unique situation.
However, it’s very important to remember that many of your assets could remain in your hands. There are a lot of myths and rumours surrounding bankruptcy and assets that are misleading. In many cases, creditors and collection agencies help push these rumours in order to discourage people from filing for bankruptcy. Meeting with a trustee can help you understand the truth regarding your assets and show you which assets you will be able to keep if you file for bankruptcy.
Discharge from Bankruptcy
If it is your first time filing for bankruptcy and you do not have to make surplus income payments, you can be automatically discharged from bankruptcy in nine months. If it is your first bankruptcy and you are required to make surplus income payments, you can be discharged in 21 months. If you have filed for bankruptcy in the past, the period will be longer before you are discharged.
Once you have been discharged from bankruptcy, you are free to begin rebuilding your financial life.
Many people worry about the impact that filing for bankruptcy will have on their credit report. When you file, a note is placed on your credit report. This note will remain for six years after you have been discharged, as long as it is your first bankruptcy. While this note can make it more difficult to get a loan in the future, it is important to remember the alternatives.
If you are unable to pay your debts as they become due, you have likely already damaged your credit report by missing payments and making payments late. If you continue down this route and do not take steps to improve your financial situation, you will continue to cause damage to your credit. If you file for bankruptcy, you will stop hurting your credit any further and you will put yourself in a position to eliminate your debts and get a fresh start so that you can then rebuild your credit.
Are You Considering Bankruptcy?
Depending on your financial situation, filing for bankruptcy may make sense for you. However, for many people, bankruptcy is not the only option. By meeting with a Trustee, you can understand all of the options that are available to you and make an informed choice for your unique situation.
Contact A. Farber & Partners today to book a free debt relief consultation. This can help you become debt free and give you a chance to rebuild your financial life.
How Can I Start A Bankruptcy?
Before you can start a Bankruptcy, we have to investigate at all the available options for debt relief. In order to do this, please schedule a free consultation.
The initial consultation is free of charge. During this consultation, you will sit down with one of our debt experts. He or she will review your financial situation with you, and provide you with information on all debt relief options available to you.
Why Choose A. Farber & Partners As Your Insolvency Trustee?
- 50+ offices (there's one near you!)
- More than 35 years of insolvency experience
- Convenient meeting times and hours
- All meetings are confidential
- Free face-to-face consultation with a trained Debt Administrator or Licensed Insolvency Trustee
- A complete review of your financial situation and your debt
- Reasonable solutions to your debt problems
Client Success Story
At 55 years old, to say that I was reluctant to engage any debt relief program or credit renewal service, would be a significant understatement. The thought of conceding to myself and others that I could not make it on my own, was both embarrassing and a personal admission of failure. I had even made an appointment and cancelled hours before, out of anxiety.
A close friend finally persuaded me that a Consumer Proposal was the only solution. On the second scheduled meeting, I proceed with the arrangements.
I was treated with complete dignity and professionalism. I was educated on what options were available and admittedly, required the details repeated, as the subject matter was not familiar.
The same level of respect continued when I was introduced to Noah Litwack. He helped with finalizing the details and subsequent follow up questions. In these days of voice mail queues, call vetting and predictable information delays, his ability to answer incoming calls and provide prompt response, is both unconventional and genuinely appreciated.
This note is a brief summary of my experience, but speaks volumes regarding how anyone in similar financially grim circumstances, would want to be treated.
I my case, 18 months ago, I had $15. left over after my biweekly bills were paid and zero credit. I now have a Secured Credit Card and the ability to set realistic future goals, which include condo ownership.