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.
Filing for bankruptcy pros and cons
Let’s get this out of the way: despite its drawbacks, bankruptcy is a positive step for people 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.
Let’s look at some of the pros and cons of declaring bankruptcy.
What are the advantages of filing 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, 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. 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, such as credit cards, personal loans and tax 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 accountable while establishing your legal rights during the bankruptcy process.
A licensed professional called a Licensed Insolvency Trustee (also known as a bankruptcy 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
While there is a cost to file bankruptcy, bankruptcy can cost less than other debt solutions if you have no assets and low earnings.
What are the disadvantages of filing bankruptcy?
There is another side to the story. Bankruptcy is not the best option for everyone and should 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. When you file for bankruptcy in Canada, your income determines how much you pay.
If you earn more than the income threshold set by the government, you will be liable for surplus income payments, and if your income goes up, your monthly payments increase. This is the opposite of a consumer proposal, where payments are fixed throughout the term.
You may also need to pay fees during the bankruptcy period to cover administrative costs.
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. The longer your bankruptcy, the more it will cost.
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
You might already know that 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, staying there for six years after discharge. However, if you are seriously considering bankruptcy, your credit is likely already severely damaged.
If any accounts have been sent to a debt collection agency, bankruptcy probably won’t cause much further damage, and it’s unlikely that you’ll be considered for any other credit until these accounts are resolved anyway.
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.
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 protect various items you own.
You may lose any assets deemed non-exempt, such as RRSP contributions you have made in the last year. Some 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 is a better option.
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.
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 repayment arrangement via 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. 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. However, if you’re in dire financial straits with no income or assets, bankruptcy might give you the best chance to be 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 a wage garnishment.
If the disadvantages of bankruptcy put you off, a consumer proposal is a popular alternative for Canadians looking to keep their assets and avoid bankruptcy. There are also other options, including debt consolidation and credit counselling.
Before you decide, always get advice from a Licensed Insolvency Trustee, who may advise on a more favourable solution.
Learn more about the pros and cons of filing for bankruptcy
Hopefully, this guide has given you a better understanding of the pros and cons of filing for bankruptcy.
While bankruptcy has many benefits, a less drastic solution may suit your needs better. Research the many Canadian debt relief programs available and get advice from a Licensed Insolvency Trustee.
If you want to learn more about debt solutions such as bankruptcy or a consumer proposal, let us connect you with a Licensed Insolvency Trustee to get a free, confidential consultation.
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