Bankruptcy is something most people don’t really understand.
When used correctly, bankruptcy can give a person who is hopelessly overburdened with debt a chance for a fresh start and a clean slate.
What Is Bankruptcy?
To put it simply, personal bankruptcy is when you surrender everything you own to a Licensed Insolvency Trustee in exchange for the elimination of your debts. Some exceptions allow you to keep some minimal necessities.
Surrendering so many of your assets might sound harsh, but bankruptcy can be a great help if your debts have spiraled out of control.
Personal bankruptcy is a legal process governed by federal law. The law is designed to allow an honest but unlucky debtor to get some relief from their debts, which also treating their creditors fairly.
Bankruptcy is a legal process and includes a ‘stay of proceedings’ that stops any legal action from happening and prevents your creditors from contacting you anymore.
Who Can File For Bankruptcy?
Filing bankruptcy in Canada isn’t complicated. To go into personal bankruptcy in Canda, a person must have lived or worked in Canda within the last year and must be insolvent. Being insolvent means:
- You owe at least $1000
- You aren’t able to meet your debts as they are due to be paid.
What Is A Trustee?
A Licensed Insolvency Trustee is a professional who can administer a bankruptcy. These trustees are federally licensed, and their fees are regulated, so the cost of going bankrupt is reasonable.
How Long Will I Be Bankrupt?
Luckily, bankruptcy doesn’t last forever. It is a legal process that is meant to provide a new start with your finances without being a punishment. Bankruptcy ends when you receive a discharge, an event which will cancel your debts.
Many factors affect how long a personal bankruptcy lasts. If you are a first-time bankrupt with a low income, you may be able to get that discharge after as short a period of nine months. However, it will last longer if you make surplus income or have been bankrupt before.
What Is The Cost of Bankruptcy?
The cost of bankruptcy will depend on how much you own and earn and on the size of your family.
You will lose all money and possession, except any assets that are exempt in your area. You will also lose part of any earnings that are seen as surplus income. Surplus income is any income over a limit set in law. This limit depends on the size of your family. Your trustee needs to see your pay stubs so they can work out how much you will need to pay based on any surplus income.
There are also administrative costs involved, including court fees, mailing costs, and government-set fees. You must also pay your trustee for handling the filing and your estate.
Taxes work differently during bankruptcy. Your trustee can give you advice on how this will apply to you, such as tax refunds or HST credits, which will now go to your estate instead of to you. You will also lose any money you get through luck, such as lottery winnings or an inheritance.
How Does My Bankruptcy Affect My Spouse?
In Canada, your spouse is not directly affected by your filing for bankruptcy. Only you are responsible for your debts. If you do go bankrupt, your debts are discharged, and your spouse is not responsible for them.
It is a common belief that when you get married, your spouse becomes automatically responsible for your debts. This is not true. It’s a common trick of collection agents to tell you that if you don’t pay, they will begin to hassle your spouse for the money instead. This is just a scare tactic. They can only go after you.
There is an exception to this. If your spouse co-signed or guaranteed your debt, then they are responsible. For example, if you took out a loan that your spouse co-signed, then they are legally responsible. If you both have a credit card on the same account, then the debt from those cards belongs to both of you.
There could be an impact indirectly on your spouse later on if you try to get any financing together, such as applying for a mortgage. As you work on rebuilding your credit, you may not be able to get credit, or co-sign a loan, and may have higher interest rates. This could be a problem for your spouse if you need to apply for credit in the future jointly.
What Will Happen To My House?
Owning a home costs a lot of money. You have a mortgage to pay and property taxes. You have bills for gas and electricity. But what happens to your house when you file for bankruptcy?
The laws vary slightly by province, but in most cases, you can’t keep a house in bankruptcy if you have a lot of equity in it. Calculate your home’s equity by taking the value of the house, and subtracting how much you still owe on your mortgage and any property taxes.
In most cases, during personal bankruptcies, the house needs to be sold so that this equity value can be used to pay your creditors. If your home has been mortgaged or re-financed recently, then you may not have much equity in it. If this is the case, then you may be allowed to keep your home and keep paying your mortgage. Talk to your trustee for clarification on whether you can do this.
If you have a lot of equity, this isn’t fair for you to keep this money while your creditor’s debts are being discharged. Usually, your trustee will have to seize and sell your home. However, in some cases, even with significant equity, you might be able to arrange to repay your equity, perhaps by borrowing from family, or by getting a second mortgage to buy back the equity from the trustee.
What Can I Keep If I Go Bankrupt?
You can keep some of your belongings when you file for bankruptcy. These assets that you may keep are known as ‘bankruptcy exemptions,’ as they are exempt from being seized by your trustee.
Bankruptcy is a process that allows a debtor to get a clean slate with their finances. When you file for bankruptcy, your assets are surrendered to a Licensed Insolvency Trustee. Those assets are then turned into cash and distributed to your creditors.
However, to get that fresh start, you need to be able to keep some essential assets as a starting point for you to start to rebuild your life and your finances. These essential assets are defined in law.
These assets vary slightly by province, but for most people, the most common and important exemptions are limited amounts of:
- Heating fuel
- Health aids
- Your car
- Your house
- Tools you require for a trade.
- Farmland, animals, equipment, and supplies
- Pensions and retirement savings
The individual province or territory decides the limits on the value of these exemptions.
For example, for a house, the limits are severe enough the most people who go bankrupt must sell their home to pay creditors, whereas you can probably keep most of your clothes unless you have valuable designer pieces. A car would need to be appraised to decide it’s value.
To put it simply, exemptions are designed to help you continue to live your life, earn a living, and provide for your family.