Struggling with debt is a stressful situation. It can be hard to know what the right thing to do is for your financial situation. Everyone’s circumstances are unique and not all solutions will be equally helpful. One of the debt relief options available to you is bankruptcy. Filing for bankruptcy can be an intimidating idea, but it can provide necessary relief and help you start over. When does bankruptcy make the most sense?
What Is Personal Bankruptcy?
The first thing you like to want to know is: what is personal bankruptcy? It is a legal process in which you assign your assets to a licensed bankruptcy trustee (now called a licensed insolvency trustee) who disburses them to your creditors (not including your mortgage lender). In exchange, you receive relief from your unsecured debts. It’s a way to get a fresh financial start.
Are There Alternatives to Bankruptcy?
Debt consolidation, credit counselling, and other financial services are often promoted as alternatives to bankruptcy. In some cases, they may result in reduced interest rates or make it possible for you to pay it all back. However, if you want debt forgiveness, there is only one other alternative: a consumer proposal.
In a consumer proposal, rather than assign your assets to a trustee, you agree to make fixed monthly payments that the trustee disburses to your creditors. Interest stops accumulating and you can make payments for up to five years. The difference between what you owe and what you can afford to repay is forgiven.
When Is Bankruptcy the Best Choice?
It can be a smart idea to start looking for alternative options to bankruptcy when you’re insolvent. Consumer proposals offer numerous advantages for people who are earning a stable income and have significant non-exempt assets.
However, in some cases, bankruptcy might be your best option. A bankruptcy trustee will help you make that decision by reviewing your financial situation, but there are some circumstances in which a bankruptcy might be a better choice than a consumer proposal:
- You have no steady income or not enough to make regular payments to your creditors;
- You have no or few non-exempt assets;
- You do not have plans to take out a major loan like a mortgage or a business loan in the near future;
- Your creditors have garnished your wages or bank accounts;
- You’re falling behind on mortgage payments because of how much you owe in unsecured debts.
Bankruptcy can give you breathing room to keep up with more important loan payments such as a mortgage and settle debts you otherwise wouldn’t be able to pay.
When Does Bankruptcy Become Your Only Option?
When you’re facing financial struggles, bankruptcy experts encourage you to start looking for a solution sooner rather than later. Delaying the inevitable might mean losing options that were previously available to you.
Bankruptcy may become your only option if your consumer proposal is rejected, you have no income to make payments in a consumer proposal, or you miss three months of payments on a consumer proposal. Consumer proposals can be amended, but it is always better to be proactive about your debts than miss payments.
Find Debt Relief Sooner than Later
The popular conception of bankruptcy is that it should be a last resort. But the reality is that waiting can be worse than proactively dealing with money you owe. Filing for bankruptcy sooner can help in several ways:
- You can avoid draining retirement savings that are protected from bankruptcy.
- You can put an end to collection efforts that add stress to your life and can hurt you finances more. The longer you neglect payments, the more court judgements can build up, including wage garnishments. Bankruptcy provides an automatic stay against these efforts.
- You can stop digging yourself into a hole. One reason many people put off bankruptcy is the damage to their credit score; however, once you start missing payments, that damage is already done. Clearing the slate and starting over often means you can start improving your credit history faster than if you struggled on trying to pay it yourself.
- You can start rebuilding your credit score by getting a secured credit card or paying off full balances each month.
Personal Bankruptcy Canada FAQ
Debt Help BC’s team of licensed insolvency trustees gets a lot of questions about debt relief. These are some of the most frequently asked questions about bankruptcy that we hear from people who come to us for help.
- How do you file for personal bankruptcy?
In Canada, only a licensed insolvency trustee can file your personal bankruptcy or a consumer proposal. You do not need a lawyer.
- How long does a bankruptcy stay on your credit history?
This depends on whether it is your first time filing or not. If it is your first time, it will stay on your credit report for 6 years from the date of discharge. If you file again, the first bankruptcy will re-appear on your credit report from Equifax and the second will remain on your report for 14 years after the date of discharge.
- What happens to your debts?
Your unsecured creditors will recover as much of their money as they can through a combination of your assets and income during the proceedings. The rest is legally extinguished when you are discharged 9 to 36 months (depending on whether you have “surplus income”) after filing.
When Bankruptcy Makes Sense
You don’t have to be in debt forever. If you owe at least $1,000 and are unable to pay your debts, have ceased paying your creditors when balances become due, or have more debts than assets, you are eligible to file bankruptcy. It may make more sense to get relief than continuing to struggle with oversized balances, missed payments, and collection actions taken against you.