If your debts are weighing you down, bankruptcy may be a solution that’s crossed your mind. The truth is that bankruptcy can eliminate burdensome debts and give you a fresh start to rebuild your financial house. However, it’s not a form of debt relief that you should take lightly, at least not without careful consideration. Filing bankruptcy is a choice that can drastically impact your finances for many years, so you should get to know what the process entails. Here are five bankruptcy facts you need to know before you file.
Let’s Talk1. You need a Licensed Insolvency Trustee to administer your bankruptcy in Ontario
Have you decided that bankruptcy is the best way to resolve your debts? If so, you first need to know that you cannot go through the process independently. Instead, you’ll need assistance from a Licensed Insolvency Trustee (LIT).
An LIT has the knowledge, training, and experience to administer a bankruptcy proceeding in Ontario and elsewhere in Canada. They’re also the only professional authorized by the Government of Canada to carry out a bankruptcy (or a consumer proposal) on your behalf. That’s exactly what we do at David Sklar & Associates.
2. You need to disclose and surrender your assets
When you file for bankruptcy, you must disclose your assets and assign them to your trustee. In turn, the trustee will arrange for the sale of your assets and distribute the proceeds to your creditors to cover your debts.
Luckily, you won’t be deprived of every last item you own – specific property is exempt from seizure under bankruptcy laws. These include your personal belongings and various financial assets, like your vehicle, clothing, furniture, life insurance, and a portion of your home equity.
Still, some assets you’re entitled to keep come with restrictions based on their market value. For example, in Ontario, you get to keep one vehicle worth up to $7,117. If your vehicle’s value exceeds this limit, you must pay out the excess amount in cash to your LIT.
3. You may have to pay surplus income
Once you file for bankruptcy, there are obligations you must adhere to if you wish to eliminate your debts successfully. One of these requires you to report your income and household expenses each month to your trustee.
Depending on your monthly earnings may need to pay out a portion to your trustee as surplus income, which will go toward settling your debts. Each year, the federal government sets an income threshold, which, if you exceed it, will necessitate payment of surplus income. This threshold further varies based on the size of your household.
You can check out 2022 surplus income limits by visiting the Office of the Superintendent of Bankruptcy website.
Calculating surplus income payments can be quite involved and tricky. At David Sklar & Associates, we can help you determine whether filing for bankruptcy will result in surplus income payments for your household and how much you can expect to pay.
4. Your bankruptcy discharge date will vary based on certain factors
Bankruptcy doesn’t occur overnight. For a first-time bankruptcy, you can expect to receive your discharge after nine months.
Of course, this assumes you’re not required to pay surplus income payments. If that’s the case, your bankruptcy may last up to 21 months before you become eligible for a discharge.
Let’s say it’s your second time filing for bankruptcy. In that case, you can anticipate a time frame of 24 months, provided you don’t need to contribute surplus income payments. With surplus income payments, you’ll need to wait 36 months before receiving your discharge.
5. Bankruptcy is the option of last resort
If you’re drowning in debt and experiencing severe financial stress, there’s no shame in considering bankruptcy. Your unsecured debts will vanish in as little as nine months. And you’ll have the opportunity to rebuild your finances from scratch.
However, it’s essential to understand that bankruptcy is the option of last resort when resolving your debt problems. Pursuing bankruptcy means:
- You’ll need to give up your assets (minus those exempt under provincial and federal bankruptcy laws).
- Your credit score will drop considerably – bankruptcy will remain on your credit report for six to seven years after discharge.
- You may need to pay surplus income payments.
- Your employment prospects may suffer. For example, suppose your role involves managing money. In that case, employers may reject your application once they spot the bankruptcy remark on your credit report.
Take Your First Step Towards A Debt-Free Life
There may be better debt solutions you can choose over bankruptcy, including a consumer proposal.
Consumer proposals are the most popular alternative among Canadians struggling with debt who wish to avoid filing for bankruptcy. Under this insolvency program, you negotiate a new payment plan with your creditors that involves wiping out a significant portion of your current debts. Then, you repay your remaining principal in fixed monthly payments over five years.
While a consumer proposal won’t eliminate 100% of your unsecured debts, you won’t need to surrender any assets. This feature makes a consumer proposal an attractive debt relief option, as losing a sizable chunk of your investments, home equity, and other assets can devastate you financially.
So, while bankruptcy is always available to help you get rid of troublesome debts, it’s wise to pursue it only if all other options aren’t feasible.
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