Things to Know Before Declaring Personal Bankruptcy

By Randall Orser | Budget

Although the pandemic created more financial stress for many Canadians, surprisingly there was a record decline in the number of consumer insolvencies filed in the second quarter of 2020 according to the Office of the Superintendent of Bankruptcy Canada (OSB). Though this sounds like good news the Canadian Association of Insolvency and Restructuring says that there is often a long delay between people recognizing the severity of their debt problems and the time that they actually seek help.

The pandemic has caused a loss of jobs, marriage break ups, long term illness and death and people who were financially secure suddenly find themselves dealing with circumstances that have totally disrupted their lives and plans and they are carrying high levels of debt into retirement.

Many Canadians have been spending more than they can afford and taking advantage of payment deferrals but as this comes to an end they may be facing difficulties in paying credit card bills and mortgages.  Though 686,000 borrowers had resumed paying their mortgages by November 2020, it is difficult to say how many others have continued to fall behind in payments until later inn 2021. 

If you are struggling financially and thinking about declaring personal bankruptcy there are four things that you need to do.

1. Consult an expert so that you can avoid making mistakes such as withdrawing money from your RRSP to pay off a credit card debt.  Creditors cannot seize retirement investments except for contributions made in the last 12 months, so you should not make a mistake that will impact your future. You should also not use your home as security for a loan as it is exempt from seizure and you need to protect your most important asset.

2. Beware of getting into the debt spiral.  Large balances on credit cards and lines of credit will require large monthly payments.  When credit limits are reached many clients will accept the increased limit offered by their financial institution and go further into debt.  Many people do not realize that if you owe $30,000 and make only minimum payments it will cost you up to nearly $65,000 in principal and interest over 30 years.  Many are unaware that this debt could be paid off by using a home equity line of credit.

3. Making a Proposal If your total debt excluding your mortgage is less than $250,000 you can make a consumer proposal which is an offer to reimburse your creditors.  This will suspend proceedings against you brought by creditors and allow you to keep most of your property. You will also be able to repay some of your debts interest free.  A consumer proposal can be competed quickly if it only entails one lump sum payment (usually made through a loan) and your creditors accept your proposal.  A proposal should always be looked at first to see if your cash flow will accommodate repaying creditors and also giving them more than they would get if you declared bankruptcy and is by far the best solution for everyone.

4. Rebuilding your credit is made easier by making a consumer proposal and if you are able to settle your proposal in less time than expected it will improve your credit score.  Once the consumer proposal is completed no debts will be reported as R7.  This rating makes it difficult and expensive to get credit.

What does declaring bankruptcy mean?

Bankruptcy means assigning control of your assets to a trustee in exchange for the elimination of your debts. A first time bankruptcy lasts for nine months, and a you will not be discharged from a second for 24 to 36 months.  When you are discharged from bankruptcy R9 (the worst credit rating) will stay on your file for six years.  If you have debts reported as R9 you will be unable to get credit or loans and you may have to dispose of assets to pay off your creditors. 

In BC you are allowed to keep

  • Clothing for yourself and dependents with no dollar limit
  • Household goods up to $4000
  • One motor vehicle valued up to $5000 if your car is worth more you can still keep it if you pay the trustee the difference between $5000 and it's value.  If you owe money on your vehicle and what you owe is more than it is worth you are can keep it as long as you continue to make payments in addition to your required bankruptcy payments.
  • Tools of your trade up to $10,000
  • Medical aids
  • Pensions and retirement savings
  • You do not automatically lose your home but if your trustee believes that your home can be sold for profit after paying all the closing costs including the mortgage, outstanding property taxes, realtors commissions, legal fees and penalties to break a mortgage then it will be sold. You will be allowed an equity payment of up to $9000 or $12,000 in Greater Vancouver or Victoria. To keep your home the better option is a consumer proposal.

If you are considering a consumer proposal or bankruptcy you should consult a licensed bankruptcy trustee to review your options.

From an article by Mathieu de Lajartre

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President/CEO Number Crunchers® Accounting Inc. Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.