Canadian Guide to Bankruptcy and How to Avoid It

What Is Bankruptcy?
Bankruptcy is the process someone undergoes when they’re unable to pay their debts. Legally by the time the bankruptcy has run its full course, most debts the person has collected are essentially forgiven, allowing the person to make a fresh financial start.

How Bankruptcy In Canada Works
Canada has bankruptcy laws and legislation in place to protect everyone involved in the bankruptcy as best they can. This is primarily done through the OSB (Office of the Superintendent of Bankruptcy) licensing appointed trustees to work with people through the process. These trustees work with the debtor in hopes of reaching a peaceful resolution with the creditors.

How To File For Bankruptcy
There are several steps in the filing process you need to make, both on your own and then with the help of trusted officials. These checkpoints you go through have been put into place to help you out. Here are the different steps, with explanations, that you will go through:

Finding A LIT
The first thing you need to do is find yourself a LIT (Licensed Insolvency Trustee). These trustees will be able to unbiasedly advise you on your financial situation and what is your best plan of attack in proceeding forward.

Meeting with the LIT
Before you meet your LIT you should spend time to get as much of your paperwork gathered as possible. The more information you have to present them with at your first meeting, the better they’ll be able to advise what options are available to you. Bring along to the meeting any paperwork and financial related documents you have. This includes print outs of online accounts and online bills.

Exploring All Options
If you’re unsure bankruptcy is the answer to your woes, discussing what options you have to avoid that path is a great place to start the conversation with your trustee. They’ll be able to show you several things you can do right now to save all the unfortunate repercussions that go along with declaring bankrupt. Options the trustee should talk about include:

Debt Consolidation Loan
Debt consolidation loans offer you the ability to pay all outstanding debts off in one big chunk. Instead of having multiple lots of interest coming in each month for your various accounts, you zero all the accounts at once and instead have just one organisation to pay back. The bonus of debt consolidation loans are providing you pay them on time they have no adverse affect on your credit score.

Debt Management Plan
This lets someone take charge of all your problem finances, however unlike a consolidation loan you handle yourself, a management plan gives you instant debt relief as someone is appointed to be the middle man between you and the creditors. While it’s noted on your credit report, the advantage is you pay the trustee once a month and they pay all the individual places you owe money to.

Consumer Proposal
Although not as bad as filing for bankruptcy, this option is on your credit report for a number of years, though it does save having to liquidate your property. The trustee comes up with a discounted amount you can pay back to the creditors, if the creditors in turn agree to leave it at that amount and not harass you over previous unpaid invoices and bills.

Deciding Bankruptcy Is the Right Option
After having explored all possible financial avenues with your advisor, if you both agree that bankruptcy is the path you will take, then the time to hand over all of your finances has come. This means everything financial you come into contact with, from this point gets handed over to your advisor. This step happens so the trustee can have full transparency over all aspects of your finances, thus being able to make the best plan in going forward with your filing. The types of documents you’ll hand over include:

– Income payslips
– bills
-credit cards
-grocery receipts
-gas cards

Filing
After having handed off all your finances to the LIT, they will make the best possible arrangements for everyone involved. This includes the people who loaned you money getting paid back through liquidation of your property. After they’ve made the best possible arrangements for all parties involved, it will come time to agree and sign the paperwork.

What Happens During Filing
Filing for bankruptcy puts certain motions into play that will directly affect different areas of your life. Everything will change to some varying degree, be it daily life, your partners income or your child’s future, everyone will have unique circumstances. To help you understand the different aspects of your life that will be altered, some more significantly than others, this section has been split into three main areas to cover it in the order most people want to know about first.

1.  Your Property, Family and Belongings
While declaring bankrupt, the idea of losing all your property and belongings, as well as what happens to your relationships with friends and family, is definitely the biggest concern to most Canadians. To address it in a way most people think about it:

Your Home
Houses fall into 2 groups:
1. High Equity Home
2. New Mortgage Home
If your house has a high equity (the market value of the house minus what you owe the bank), then you will likely have to hand it over to the LIT in order for it to be liquidated. If you’ve only just begun your mortgage then you might not be required to hand it over as the equity is so low, and usually protected by Canadian provincial law up to a certain value.

Your Spouse
Unless your spouse was guarantor or co-signer on any of your debts, they will not be dragged into your bankruptcy at this point of, as debt and declaring bankruptcy is individualistic.  However when it comes time to make surplus income repayments on the debt, after you’ve filed for bankruptcy, your spouse will be indirectly affected. This is explained in more detail further down.

Your Children
If your child’s college fund is in a savings account under your name, unfortunately you will probably lose it. Speak to your LIT about all the different exemptions available in your province.

Your Belongings
A lot of provinces have differing laws on what can and can’t be collected for liquidation. Things like tables and chairs or beds, are usually the sorts of things the province doesn’t let be taken from you. Not just because their base value is already so low, but also because these sorts of objects are essential living items. However a luxury surround sound system is not considered a basic essential living item, so it would be taken and sold in order to pay back some of the money you owe.

2.  Time Bankruptcy Lasts In Canada
The actual time you’ll be bankrupt depends on your exact situation. For most Canadians it will be about 7 years. For Canadians who’ve been bankrupt before, the time will be a much longer 14+ years. This time comes from the 9 months it takes to be let-go from the bankrupt system, plus the 6 years following that where you are on record as having declared bankrupt.

3.  What Happens Financially
Declaring bankruptcy doesn’t make you immune to all your existing debts. While most unsecured debts will be wiped away, certain secured debts and financial obligations stick. These can include things like:

-Child Support, Spousal Support and Alimony
-Student Debts
-Mortgages, Car Loans
-Fines and Claims Issued by Courts

After Declaring Bankruptcy
There are still several steps you need to undertake after you’ve declared bankrupt in order to get on with your life. These steps are put into place by the courts in order to help you refrain from making the same mistakes the next time around.

Credit Counseling
The courts require you to attend a minimum of two financial counseling sessions. You should use these sessions as an opportunity to learn about what led you to bankruptcy and see what steps you can put into place to prevent it happening again.

Ongoing Commitments and Repayments
While you’re in the pre-discharge period, any surplus income you make has to be handed over to the trustee so they can pay back the creditors. This happens if your spouse’s monthly income, plus your monthly income, are deemed by the OSB as being higher than the amount needed for you to maintain a reasonable standard of living. Anything you make above that reasonable standard of living amount will go to the creditor.

Leaving Bankruptcy Behind
Getting discharged from the bankruptcy is the final step in the process. If it’s your first time being bankrupt this discharge should happen automatically after about 9 months from the date you filed the paperwork. Sometimes you’ll find your situation needs monitoring more closely and can take longer than 9 months if the courts are not satisfied. This can happen because of your failure to comply or your situation changing and includes things like:

-Not receiving financial counseling
-Earning a higher income
-Failing to make payments

If you’ve done everything that’s been asked of you and participated to your best ability with both the LIT, the courts and creditors, and the courts are happy, you will be granted the discharge.