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What you should know about filing bankruptcy

Bankruptcy is a scary term for most people, and something we all try to avoid. But sometimes you find yourself in a situation where declaring bankruptcy is really your only option.

There are a lot of myths and misinformation surrounding bankruptcy and what happens if you file bankruptcy. Let’s look at some of the myths, and dive a little deeper to find out what it really means to declare bankruptcy.


How does bankruptcy work?


Bankruptcy is a process where you hand over all your assets to a Licenced Insolvency Trustee, and in return they help you eliminate your debts. The trustee works with your creditors so that instead of receiving nothing, they receive some money towards paying off your debt. That debt is then cancelled. Basically, they'll sell off whatever assets of yours that they can, and then use that money (and some of your salary) to negotiate with your creditor(s).

During the bankruptcy process you meet with the trustee regularly. They'll help you determine how much of your salary can go towards paying off debts, while ensuring you can still pay your monthly bills (mortgage, rent etc.). While you are going through bankruptcy you are also required to attend courses on managing finances.

 

How long does it take to discharge (or be done with) bankruptcy?


Filing for and then discharging from bankruptcy can take as little as 9 months or up to several years to. Being discharged means that you are no longer held responsible for the debts in question, and they are closed. You should note that a bankruptcy will remain on your credit report for an average of six years after discharge.

 

Is filing for bankruptcy a big deal?


Yes. While some people believe that filing for bankruptcy is an easy way to get rid of your debts, it has long-term consequences on your ability to take on credit in the future. Young people in particular seem to fall into this thinking, believing they’ll have their whole lives to get their credit back on track. While it is possible to come back from bankruptcy, and many people do, it should be considered as a last resort for those in financial distress.


Will you lose everything if you file for bankruptcy?


Each province and territory has different rules and regulations for what assets can and cannot be taken as part of your bankruptcy. The goal is not to punish you, or leave you with nothing. The goal is to take what is reasonable so that you can clear debts, while still allowing you the ability to survive day to day. Assets such as your car, depending on its value, or household goods over a certain value will be exempt.

 

Your trustee can give you more information about the rules specific to where you live. Generally speaking, the types of assets taken are investments like RESP money, or any other investments you may have.

 

Will bankruptcy ruin your credit score?


Not necessarily, or at least not bankruptcy on its own. Yes, for most creditors, seeing a bankruptcy on your file is a negative. However, most people who find themselves in a position where they’re going to declare bankruptcy have months or even years of delinquent or unpaid bills on their credit history. So, the act of declaring bankruptcy isn’t the only thing that causes your credit score to drop.


Filing for bankruptcy isn’t a free way to get rid of your bills.


While filing for bankruptcy will ultimately end in eliminating some of your debts, it doesn’t eliminate all of your financial obligations.

Bankruptcy eliminates unsecured debt such as:
-Personal loans
-Credit cards

 

Bankruptcy doesn't eliminate the following:
-Secured debts such as a mortgage
-Alimony
-Child support
-Student loans if it has been less than 7 years since you graduated

 

Filing for bankruptcy can be a difficult process. It’s important that if you’re considering doing so you understand all of the ramifications, and what it will mean for your personal financial situation, as well as that of your family, or your household. A Licenced Insolvency Trustee can give you advice tailored to your specific situation, and advise whether bankruptcy is the right decision for you. You can find out more information on filing for bankruptcy in Canada on the Government of Canada website here.