If you have little hope of resolving your debts and time is running out, what do you do?

When you’ve exhausted all other options, filing for bankruptcy is sometimes the best way to stop the rot.

But you must consider the advantages and disadvantages of bankruptcy, which we will look at in this guide.

Let’s dive right in.

The advantages of bankruptcy

Let’s get this out of the way: despite its drawbacks, bankruptcy is a positive step for people who are struggling with overwhelming debts they cannot afford to repay.

Choosing bankruptcy releases people from their overwhelming debts and enables them to make a fresh start.

Firstly, let’s look at the advantages of bankruptcy.

1. Protection from creditors

The most profound benefit of bankruptcy is that it automatically protects you against any impending action from creditors, providing you with some breathing space.

Once filed, a 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. At this stage, your Licensed Insolvency Trustee can unfreeze bank accounts.

As this is a legal agreement, creditors must conform to these rules.

2. Eliminate your debts quickly

The great thing about bankruptcy is that you can eliminate most of your unsecured debts in as little as nine months.

You do not need creditor approval to file for bankruptcy, and 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 and 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 to account while also establishing your legal rights during the process.

A licensed professional called a Licensed Insolvency Trustee will liaise with your creditors on your behalf. In addition, they will arrange financial counselling sessions to help you manage your finances better in the future.

4. It can sometimes cost less

If you have no assets and no surplus income because your earnings are low, bankruptcy can cost less than other debt solutions.

The disadvantages of bankruptcy

Now, of course, that is just one side of the story.

Bankruptcy is not the best option for everyone and should always be considered carefully.

Here are the disadvantages of bankruptcy.

1. It can sometimes cost more

Bankruptcy can be expensive if you have a substantial income or if your income suddenly increases.

When you file for bankruptcy in Canada, your income will determine how much you pay each month.

If you earn more than the income threshold set by the government, you will be liable for surplus payments. Likewise, if your income goes up, your payments will increase.

You may also need to pay fees during the bankruptcy period to cover administrative costs.

This is the opposite of a consumer proposal, where the payment is fixed and will never change throughout the term.

See also: How much does bankruptcy cost?

2. It can take longer to complete

In most circumstances, a first-time bankruptcy lasts nine months.

Filing a second bankruptcy can extend your bankruptcy period. In addition, if you are required to pay a surplus income, this also increases the duration of your bankruptcy.

The longer your bankruptcy, the more it will cost.

  • If this is your first bankruptcy and you have no surplus income, your bankruptcy will last nine months.
  • If this is your first bankruptcy and you have surplus income, your bankruptcy will last 21 months.
  • If this is your second bankruptcy and you have no surplus income, your bankruptcy will last 24 months.
  • If this is your second bankruptcy and you have surplus income, your bankruptcy will last 36 months.
  • third bankruptcy requires a discharge hearing in bankruptcy court. The court will decide if you should be discharged and when.

3. You must submit proof of income

You will be required to submit proof of your income each month as part of your bankruptcy duties.

4. It will damage your credit

You might already know that bankruptcy damages your credit score, which can make obtaining credit more difficult in the future.

Every credit account is assigned a credit rating scale from 1 (the best) to 9 (the worst) on Canadian credit reports.

When you file, each credit account included in your bankruptcy is given the worst possible rating possible (9), which damages your credit score.

On top of this, a record of your bankruptcy appears in the public reports section of your credit report.

A first bankruptcy appears on your credit report for six years after discharge or fourteen years for a second bankruptcy.

But, if you’re at the point of considering bankruptcy, it’s likely your credit is severely damaged anyway.

In fact, if any accounts are in collections, bankruptcy probably won’t cause any significant further damage, and it’s unlikely that you’ll be considered for any further credit until these accounts are resolved.

You’ll find that bankruptcy allows you to make a fresh start and repair your finances further down the line.

See also: How does bankruptcy affect my credit score?

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.
  • Submit proof of income each month.
  • Provide income tax return information.
  • Attend financial counselling sessions.

You must complete these tasks to be discharged.

These tasks will be explained to you in detail by your Licensed Insolvency Trustee, who will guide you through the process to make it as easy as possible for you.

6. Your assets may be at risk

In bankruptcy, you surrender your assets to a Licensed Insolvency Trustee, which may or may not be sold and distributed to your creditors.

Each province and territory has different rules on which assets you can keep, called bankruptcy exemptions.

You may lose any assets deemed non-exempt, such as RRSP contributions in the last year. Savings and investments might also be affected.

When your home has equity over the exemption limit, 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 could be an alternative solution.

Secured car loans are not affected by bankruptcy as long as you continue to repay the loan. If you own your car, you can keep your vehicle if it’s valued below the exemption value.

Because every situation is different, always speak to a Licensed Insolvency Trustee.

7. Not all debts can be discharged

Not all debts can be discharged through bankruptcy, such as:

  • Secured debts such as 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. lied 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.

Here’s a tip: Speak to a Licensed Insolvency Trustee who will help you protect your assets.

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8. A court hearing may be required

A bankruptcy can involve a court hearing if any creditor objects.

9. 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.

Always be sure to check any regulations with your professional association or society.

If this affects you, a repayment arrangement via a consumer proposal is a better alternative as your employment is not affected in most cases.

10. You cannot be a director of a company

You are not allowed to be a director of a company while bankrupt.

But 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 sometimes, bankruptcy makes more sense if you’re in dire financial straits with no income or assets.

Before you decide, always get advice from a Licensed Insolvency Trustee, who may advise on a more favourable solution.

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Conclusion

Hopefully, this guide has given you a better understanding of the advantages and disadvantages of bankruptcy.

While bankruptcy has many benefits, there’s a decent chance that a less drastic solution could suit your needs better.

Always research all debt relief solutions and get advice from a Licensed Insolvency Trustee.

Key advantages of bankruptcy

  • It eliminates most unsecured debts.
  • Stops harassment from creditors.
  • Provides legal protection from your creditors.
  • You can be debt-free in as little as nine months.

Key disadvantages of bankruptcy

  • Your credit is negatively affected.
  • You may lose any non-exempt assets.
  • Surplus income can increase the cost and extend your bankruptcy period.
  • You must carry out some bankruptcy duties.

Bankruptcy might be the best option if

  • You are overwhelmed with debt.
  • You have more debt than you can afford to repay, and you can’t meet your financial obligations.
  • You are being bombarded with collection calls.
  • There is legal action pending for your debts, or you have a wage garnishment.

If the disadvantages of bankruptcy put you off, consider a consumer proposal.

A consumer proposal is a popular alternative for Canadians looking to keep their assets and avoid bankruptcy.

Benefits of a consumer proposal

  • Reduce and consolidate your debt.
  • Protect your assets, such as your home and car.
  • Stop creditor action.
  • Your payments will never increase.
  • Avoid bankruptcy.

If you want to learn more about bankruptcy or a consumer proposal, let us connect you with a Licensed Insolvency Trustee today for a free, confidential consultation.

Free consultations are available by video, phone and in person.

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