A scary word to many, bankruptcy means relief from the stress built up from struggling to pay bills and from harrassment by creditors and threats of legal action from collection agents.
Everyone knows bankruptcy is always the last choice in dealing with your debts - even bankruptcy trustees suggest bankruptcy might be your best option only when there are no other better options.
Does your situation seem hopeless because there is not enough money to go around? Do you have difficulty sleeping? Do unpaid bills make you feel sick? Are collection agents calling you? Are you afraid to answer the phone? Are you receiving phone calls at work?
Bankruptcy might be your best option. To find out, meet with a Licensed Insolvency Trustee. They are required to make sure you are aware of all your options. Of the approximate 120,000 Canadians obtaining help each year through formal bankruptcy and creditor proposals roughly 60% file bankruptcies. The other 40% are consumer proposals. Be sure to read our write-up on consumer proposals.
Why you might want to consider bankruptcy.
Realistically, because there’s no other realistic alternative in your circumstances.
Creditors will stop bothering you! Legally, unsecured creditors are no longer allowed to pursue you to collect any amount you owe to them. Enforcement activity such as the attachment of your wages and the garnishment of your salary will stop.
You will get rid of your debts. Life will be affordable! The plan is that, in time, you will be completely free from your unsecured debts – that you will receive a discharge and be released from your unsecured debts.
You’re going to get good at managing money! Your Licensed Insolvency Trustee will ask you to report monthly – s/he wants to know your monthly income and expenses. S/he wants assurance that you can keep track of your income and expenses because this leads to strong financial management and budgeting skills.
You’ll receive free counselling sessions! Learn to budget, save, and set goals. You’re on your way to accomplishing some real objectives!
How does bankruptcy work?
Click on our Find a Trustee page to locate a trustee wherever you are. Set up a free initial consultation, and take with you a list of your debts. Licensed Insolvency Trustees are government-licensed and regulated and are the only financial advisers that are required to fully inform you of all your options – bankruptcy is just one of your options.
Your Licensed Insolvency Trustee will want to know your household income, your assets, and your debts. At your meeting you will receive an outline of your options and the pros and cons of each option available to you, within reason, and tailored to your specific circumstances.
If you wish to proceed with a bankruptcy filing, your Licensed Insolvency Trustee will need more information from you and will give you an explanatory kit. When your trustee is satisfied that in your circumstances bankruptcy is a suitable option for you, you will sign several papers. At this stage it is especially important to provide honest answers to the trustee’s questions. Some of these papers are shared with your creditors – your Licensed Insolvency Trustee will notify them of your bankruptcy so they will stop bothering you.
What debts are included?
Think of all your debts – credit cards, bank loans, lines of credit, income taxes, student loans, overdrawn bank accounts, loans from individuals, payday loans, etc. Make a list of them for your trustee to review.
When you are discharged from your bankruptcy you will be released, or freed, from your unsecured debts with some exceptions. Canadian government social policy dictates that some debts will remain. You cannot avoid paying some debts by going bankrupt, such as debts for student loans (unless you are more than 7 years past your end-of-study date), amounts owing for child support or spousal support, debts from fraud or embezzlement, and certain others. Most people do not have any of these types of debts.
What about bankruptcy and secured debts?
Sometimes there is a pledge of collateral to a lender. These are known as secured financing transactions, or secured debts.
The most common forms of secured debt are motor vehicle loans and leases, and real estate mortgages. The general rule for these is that you can keep the collateral (the asset) as long as you do not default under the security agreement. For a common motor vehicle lease or purchase financing agreement this means that you must be up-to-date in your payments.
If you are behind in your payments you are giving the lender the right to seize or repossess the collateral. Or, if you stop your payments, you should expect the collateral to get picked up. Sometimes, this can be a strategic decision you make to improve your cash flow.
There are many more forms of secured debt including:
· security deposits we place when we get secured credit cards;
· the registration by Canada Revenue Agency of a lien for unpaid taxes against real estate we own;
· monies held by banks, and investments held by investment houses as collateral for loans we owe to them;
· general security agreements where (mostly) corporations pledge their assets to lenders;
· Bank Act security such as a grant by a company of its inventories to a chartered bank;
· Assignments of book debts where accounts receivable a pledged to a lender; and
· Pledges of household furniture, boats, airplanes, etc.
Secured debts need special treatment – your Bankruptcy Trustee will discuss this with you.
What is a BIA section 172.1 "tax debtor"
The Canadian government requires special treatment in situations where individuals have income tax debts exceeding $200,000 and those tax debts exceed 75% of all your unsecured debts. In these cases, you are known as a “tax debtor”. For tax debtors there must be an application to Court which will decide on the discharge terms. If you are a tax debtor, read section 172.1 of the Bankruptcy and Insolvency Act, which summarizes the matters the Court will take into consideration when deciding on the terms of your discharge.
When you receive your discharge
Your ultimate goal is to be discharged and therefore to be released from your unsecured debts.
The Bankruptcy and Insolvency Act states that unless you are a “tax debtor” then there are dates when you are eligible to receive your discharge from either a first or a second bankruptcy. If this will be your third or fourth bankruptcy then an application must be made to Court for the terms of your discharge to be decided.
If this will be your first bankruptcy then you are eligible to be discharged automatically after 9 months (21 months if you have a requirement to pay surplus).
If this will be your second bankruptcy then you are eligible to be discharged automatically after 24 months (36 months if you have a requirement to pay surplus).
How you will know if you have “surplus”
From the monthly reports you provide to your Licensed Insolvency Trustee a calculation will be made whether you have surplus. The calculation considers the number of persons in your household, the incomes of each person, and certain expenses such child support payments you must make and the out-of-pocket costs relating to a medical condition.
Whether you have a requirement to pay surplus is very important because it affects both the cost and the duration of your bankruptcy. Your trustee will perform this calculation when you first meet. As a rough guide, a single person must pay to their trustee surplus equal to one half their net monthly income that exceeds $2,089 monthly. There can be adjustments. Larger family units are allotted increasingly higher monthly standard amounts. If you have a requirement to pay surplus then you must pay it.
Your Licensed Insolvency Trustee determines when you are eligible for an automatic discharge by firstly ascertaining whether it is your first or second bankruptcy (or more!). For first-time bankruptcies, this calculation will be made by the Trustee after 7 months into your bankruptcy. The calculation is made after 22 months for second-time bankruptcies. The calculation is made by reference to the regular monthly reports you must provide to your trustee. In these reports you are to summarize your income and expenses.
From this, it is clear that there are some uncertainties in bankruptcy – you don’t know exactly how long it will last, and you don’t know for sure exactly what it will cost you. But then, you control your income!
Bankruptcy has a minimum cost
Bankruptcy is not free. Licensed Insolvency Trustees are highly educated professionals and every one will require than s/he receive a certain minimum amount to cover their costs. They will discuss this with you.
You can lose assets by going bankrupt
You can keep certain of your assets known as exemptions but every other asset or entitlement is “property” that you will actually assign to your trustee. Your trustee is expected to convert that property into cash and distribute the monies as stipulated in the Bankruptcy and Insolvency Act.
This property that will go to your Licensed Insolvency Trustee includes an agreed cash deposit, income tax refunds, the quarterly GST credits, sometimes motor vehicles, jewellery, timeshares, registered education savings plans, and more. You should have a frank discussion with your trustee about the assets and rights that you have.
Sometimes, before they are discharged, a person who is bankrupt wins a lottery or becomes entitled to an inheritance. These must be paid to your Licensed Insolvency Trustee as required to pay your creditors.
What exemptions can I keep?
This will be an important discussion with your Bankruptcy Trustee. Both Canada and the Provinces have established laws regarding the assets you can keep and that no one can take from you - neither your Bankruptcy Trustee nor your creditors.
Although the rules vary from province to province, you should be permitted to keep all your clothing, your household furnishings and appliances to a legislated maximum, certain equity in your motor vehicle and your principal residence, necessary medical devices, at least some of your tools of trade, perhaps your retirement pensions, and more. Your Bankruptcy Trustee will discuss this with you.
Bankruptcy and Income Taxes
Bankruptcy creates a year-end for tax purposes and in 2013 there will be two income tax returns – “pre” and “post” bankruptcy returns. The cut-off point is the date of your bankruptcy. The Bankruptcy Trustee will prepare these returns and if there are refunds, they will be paid to your Bankruptcy Trustee for the benefit of your creditors.
You will file your own income tax return starting with the 2014 taxation year.
What if not everyone agrees that you can be discharged automatically?
If you do not receive your automatic discharge it is because your discharge has been opposed. An opposition by a creditor s quite rare and most oppositions are made by the Bankruptcy Trustee because the bankrupt did not perform all the duties required of them. Your duties, generally, are to:
· pay the required monies;
· attend two financial counselling sessions;
· on a timely basis, provide a monthly report of receipts and disbursements for each and every month of the bankruptcy; and
· provide reasonable assistance your Bankruptcy Trustee may need.
All of this might seem a little onerous. Remember that the administration and difficulty of your bankruptcy depends upon your circumstances. Be open and honest with your Bankruptcy Trustee. That’s the only way they can help you. Contact a Bankruptcy Trustee now and set up a free consultation.