When you have little hope of resolving your debts and time is running out, what do you do?
If you’ve exhausted all other options, filing for bankruptcy is sometimes the best way to stop the rot.
To help you decide, here are the pros and cons of filing for bankruptcy in Canada.
Pros and cons of filing bankruptcy
Despite its drawbacks, bankruptcy is a positive step for people struggling with overwhelming debts they cannot afford to repay.
Bankruptcy releases people from their debts, enabling them to make a fresh start.
Let’s look at some of the pros and cons of declaring bankruptcy.
Pros of bankruptcy
1. Protection from creditors
Bankruptcy protects you from creditors and gives you some breathing space.
Once filed, an automatic Stay of Proceedings begins, meaning your creditors can no longer initiate or continue legal proceedings against you.
Collection calls, wage garnishments and any legal action will stop. As this is a legal agreement, creditors must conform to these rules.
2. Eliminate your debts quickly
Bankruptcy gets rid of most unsecured debts in as little as nine months. This includes credit cards, personal loans, payday loans, unsecured lines of credit and tax debts.
There are some debts that cannot be discharged, such as court fines or penalties, which we will cover in more depth in the cons section.
You do not need creditor approval to file for bankruptcy. Once it’s completed, you are released from your debts, and you can start rebuilding your credit.
3. Your rights are protected
Bankruptcy is a legal process governed by Canada’s Bankruptcy and Insolvency Act legislation. It’s carried out by professionals licensed by the Government Office of the Superintendent of Bankruptcy (OSB).
This ensures that everyone involved in your bankruptcy is held accountable while establishing your legal rights during the bankruptcy process.
A Licensed Insolvency Trustee (or a bankruptcy trustee) is a certified specialist that works with your creditors on your behalf. They will also arrange financial counselling sessions to help you manage your finances better.
4. It can sometimes cost less
Depending on your financial situation, the cost of bankruptcy can be lower than other debt solutions. If you have no assets and low earnings, bankruptcy might make more sense.
Cons to bankruptcy
What is the downside of filing for bankruptcy? Bankruptcy is not the best option for everyone and should be considered carefully. Here are the disadvantages of filing for bankruptcy.
1. It can sometimes cost more
Bankruptcy can be expensive if you have a substantial income. When you file for bankruptcy in Canada, your income determines how much you pay.
You pay more if you earn more than the government’s surplus income threshold, and your payments will rise if your income goes up. If you have a high income, a consumer proposal might be better because the cost never changes.
2. It can take longer to complete
In most circumstances, a first-time bankruptcy lasts nine months, but filing a second bankruptcy lasts 24-36 months. If you are required to pay surplus income, this increases the length of your bankruptcy and costs more.
3. You must submit proof of income
You must submit proof of income each month as part of your bankruptcy duties.
4. It will damage your credit
Bankruptcy damages your credit score, which can make obtaining credit more difficult in the future.
A record of your bankruptcy appears in the public reports section of your credit report. It will stay on your credit report for 6 years after discharge.
If you have missed payments or debts in collections, your credit score has probably already been affected, so bankruptcy could help improve your credit by resolving your outstanding debts.
5. You must perform some duties
To be discharged from your bankruptcy, you must perform some duties during the process:
- Surrender your assets and credit cards.
- Make your payments on time.
- Submit proof of income each month.
- Provide income tax return information.
- Attend financial counselling sessions.
Your Licensed Insolvency Trustee will guide you through the process to make it as easy as possible.
6. Your assets may be at risk
In bankruptcy, you surrender your assets, which may or may not be sold and distributed to your creditors. Each province and territory has different rules on exempt assets, which determine what you can keep.
You may lose any assets deemed non-exempt, such as RRSP contributions you have made in the last year, some savings and investments, and your tax refund for the year.
If your home has too much equity, you need to pay this surplus equity to your creditors through your bankruptcy. If you can’t afford to do this but want to protect your home, a consumer proposal is a better option.
Secured car loans are not affected by bankruptcy as long as you continue to repay them. If you own your car, you can keep it if it’s valued below the exemption value.
A consumer proposal is an attractive alternative if you have income and assets to protect.
7. Not all debts can be discharged
Not all debts can be discharged through bankruptcy, such as:
- Secured debts like a mortgage or car loan.
- Property taxes.
- Fines or penalties imposed by a court, e.g. a parking ticket or fine.
- Unpaid alimony or child support.
- Debts obtained by fraud.
- Debt obtained through false pretence (e.g. lying on a loan application).
- Student loans (if less than seven years since leaving university or college)
- An award by a civil court for damages arising from personal or sexual assault.
8. It can impact your employment
Some professional associations have standards that require individuals to disclose if they are bankrupt, such as accountants, lawyers and investment brokers. Ensure that you check with your professional association or society before you file.
If this applies to you, a consumer proposal is a better alternative, as your employment is not affected in most cases.
9. You cannot be a director of a company
You are not allowed to be a director of a company while bankrupt. If you file a consumer proposal, you can continue to be a company director and stay in control of your business.
Is bankruptcy suitable for me?
For many, bankruptcy can be avoided by filing a consumer proposal instead. But if you’re in serious trouble with no income or assets, bankruptcy might be the best way to become debt free.
Bankruptcy might be the best option if you:
- are overwhelmed with debt
- have more debt than you can afford to repay, and you can’t meet your financial obligations
- are being bombarded with collection calls
- have legal action pending for your debts or wage garnishment.
If the disadvantages of bankruptcy put you off, a consumer proposal is a popular alternative.
There are other options as well, like debt consolidation and credit counselling. Before you decide, always get advice from a Licensed Insolvency Trustee, who may advise on a more favourable solution.
Hopefully, this guide has given you a better understanding of the pros and cons of filing for bankruptcy in Canada.
If you have a low income, no assets and overdue bills, the pros of bankruptcy might outweigh the cons. A consumer proposal is often better if you have a high income and assets to protect, such as your home.
There are many Canadian debt relief programs available, so get advice from a Licensed Insolvency Trustee. Connect with a Licensed Insolvency Trustee for a free and confidential consultation.
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Are there benefits of claiming bankruptcy?
Filing for bankruptcy has some advantages, including creditor protection and the ability to consolidate and eliminate your debts quickly, but it damages your credit score and can be expensive if you have a high income. Additionally, you may have to surrender assets that are deemed non exempt.
What is the minimum amount to file bankruptcies?
If your unsecured debt total is over $1,000, you can’t pay your creditors, and your debts are more than your assets, you may qualify to file for bankruptcy.
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