Bankruptcy explained

Note: If you need more information, please contact a Trustee in Bankruptcy. The purpose of this article is only to give a general overview of bankruptcy in Canada.

Too often, bankruptcy is portrayed as being the easy way out or the only solution. You fill-in the forms, sign the documents and voilà! Your debts are gone and you are good to go on with your life. Not so fast!

Bankruptcy is a legal, binding process in which a debtor turns all their assets to a Trustee in Bankruptcy in exchange for debt relief. Once a person files for bankruptcy, it will stop any legal action from creditors against them, stop the garnishing of their wages and phone calls from collection agencies.

If you choose this option, it doesn’t mean you have nothing else to do or no other payments to make.

• As long as you are not discharged, you must submit a monthly statement of income and expenses, to determine if a surplus income exists. If there is a surplus income, you will be required to give 50% of it, and the amount will be distributed to your creditors or applied towards your Trustee’s fees. The thresholds for surplus income are determined by the Office of the Superintendent of Bankruptcy.

•  You have to pay your Trustee. These people do not work for free. They will charge you a monthly fee to administer your bankruptcy until you are discharged.

• You have to attend two financial counselling sessions and give-up all your credit cards/lines.

• You have to turn all your non-exempt assets to the Trustee. Each Province allows people to keep certain assets or a certain portion of assets. They are called exempt assets. As a rule of thumbs, “cash assets” are primarily forfeited. If you happen to have savings, investments, win the lottery, receive an inheritance, you have to give these to your Trustee for distribution to your creditors. Your Trustee will also file your tax return on your behalf the year you filed for bankruptcy. If you have a refund, it will be taken as well.

• You have to attend any meeting requested by your creditors and any examination requested by the Office of the Superintendent of Bankruptcy for as long as you are not discharged.

For properties, it all depends on the equity available. If there is a substantial equity, it will most likely be seized. If the equity is small, your Trustee will allow to keep your home, provided you can pay for the mortgage. If you can’t, you will face foreclosure.

The length of bankruptcy depends on whether it is the first time or not, and whether there is a surplus income. For a first-timer with no surplus income, it is 9 months. With a surplus income, it is 21 months. A bankruptcy will also ruin your credit score and remain on your file for 7 years.

Certain debts cannot be included in a bankruptcy, such as student loans, alimony and child support payments, fines or penalties imposed by a Court and debts incurred by fraud or misrepresentation.

Bankruptcy is definitely not a walk in the park. It should only be considered as a last resort.