Are you mulling over whether or not to file for bankruptcy? Have you already given it a lot of thought and pretty much decided to go ahead with it? Before you do, take a moment to understand the bankruptcy process and how such a serious decision may significantly impact your credit, and your future.
What is bankruptcy?
Bankruptcy allows honest people who cannot pay their debts to obtain a discharge from the legal obligation to repay them. You may file for bankruptcy through a Licensed Insolvency Trustee, who will complete the necessary forms with you.
What happens immediately after I file for bankruptcy?
From the moment your bankruptcy is filed, your trustee essentially takes over dealing with your creditors. The trustee will notify all your creditors about your bankruptcy, and deal them on your behalf. This means you stop making any payments to creditors directly. Any garnishments against your salary, as well as legal proceedings initiated against you by creditors, will also stop immediately.
What happens to my debts?
Upon discharge from bankruptcy, most of your debts will be extinguished, meaning you don’t have to pay them back at all.
However, other obligations will still need to be paid. These include debts such as child support and alimony payments, debts obtained by fraudulent means or misrepresentation, student loans (provided it’s been less than seven years since you were a full- or part-time student), and fines or penalties imposed by the court.
Will I lose all my assets?
The whole point of filing for bankruptcy is to help you get back on track and offer you a fresh start. With your trustee’s assistance, you won’t be left empty-handed without any means to do so. In fact, you are legally permitted to keep some assets in a bankruptcy.
The assets you get to keep vary by jurisdiction. For example, for personal bankruptcy in British Columbia, you will get to keep:
- the essentials, like food, necessary clothing and medical aids;
- $4,000 worth of household goods, such as furniture;
- up to $10,000 worth of tools you need for work;
- certain insurance investments, where the designated beneficiary is a spouse, child, grandchild, or parent of the person whose life is insured; and
- RRSP investments, except those amounts invested in the year prior to bankruptcy.
With respect to your car, you are exempted for a motor vehicle worth $5,000 (and $2,000 for maintenance debtors).
As for your home, it depends on the equity you’ve built up. Again, it varies by province. In British Columbia, exempted assets include equity in a home valued at $9,000 (or $12,000 if you’re living in the Capital Regional District and Greater Vancouver Regional District).
All assets that are not exempt from the bankruptcy will automatically be given to your trustee, whose duty it is to put them toward the benefit of your creditors. Such assets may include:
- non-exempt real estate and motor vehicles;
- financial assets, like GICs and term deposits; or
- valuable personal effects, including jewelry, collectibles, and so forth.
What happens to my income and any windfalls I receive?
Income must be reported to the trustee each month during the bankruptcy process. A standard level of income is set by the Superintendent of Bankruptcy, and is based on the number of dependents in your household. Any income earned above this amount is considered surplus income, and a portion of such surplus income must be paid to the trustee during your bankruptcy. Accordingly, be aware that you may need to make additional payments to your trustee, which will be distributed to your creditors.
Also note that any property you obtain or acquire rights to while you’re not yet discharged from bankruptcy must be reported to your trustee. Such property will then be given to your trustee to pay your creditors. This includes money received from windfalls, such as winning the lottery or any inheritance you may get. Anything remaining after payment of your creditor’s claims will be given back to you.
What will the effect of a bankruptcy be on my credit rating?
Unfortunately, a person who declares bankruptcy will get the lowest credit rating score possible. Depending on your jurisdiction, a personal bankruptcy generally stays on your file for six or seven years from the date of discharge for a first bankruptcy, and 14 years for subsequent bankruptcies.
Will I ever be able to get credit again?
The answer to this question is yes, but the ease and timing of getting new credit can often vary between lenders. Really, it depends on your ability to a convince lender of your creditworthiness and ability to repay your debt.
During the period that your bankruptcy shows up on your credit report, you can still get credit if you show successful attempts to repair it such as continuing payments on a car loan or mortgage. Be sure that you complete your bankruptcy as soon as possible (so you can be discharged as soon as possible), begin to save money where you can, contribute to an RRSP, and keep paying your bills on time.
Once the bankruptcy is cleared from your credit record, you’ll be in the same position as someone with no credit history at all. This means you may not get access to the best rates. But the great news is that you can finally start over, and make your best efforts to manage your credit better this time around, building and strengthening it for the future.
How do I start over?
As part of your bankruptcy, you will need to attend two credit counseling sessions, which are intended to help you understand why you had to file for bankruptcy in the first place, and teach you necessary money management skills to avoid it from happening again.
Even though you may have lost some assets in the process, by the end of your bankruptcy, once your debt is discharged, you will have a fresh slate to work with and the opportunity to start again.
Where can I get more advice prior to filing for bankruptcy?
Filing for bankruptcy is an important decision that is often considered a debtor’s last resort. If you’re considering it, you should immediately consult with a Licensed Insolvency Trustee who can advise you as to your available options, guide you on how best to proceed in the given circumstances, and what to expect if bankruptcy is in fact your only option.
Slocombe & Associates Inc. is a Licensed Insolvency Trustee firm with four offices serving 11 locations across British Columbia. Let our seasoned staff help you make the best decision in your particular circumstances to get you the fresh start you deserve today. The best part is, the first consultation is free. Don’t hesitate to reach out at 1-877-223-3630.