It’s easy to get confused about bankruptcy laws since they vary by province and by country. Clients come into the firm for their consultation with a licensed insolvency trustee and quickly realize that they’ve been misinformed about their debt relief options. If you are considering filing for personal bankruptcy in Ontario, read this important guide to get the facts about the process and to dispel any myths and misunderstandings.
United States Bankruptcy Laws
Many clients get their information about bankruptcy from the internet. In their searches, they find resources from different countries that can give them flawed expectations about the debt relief process. One of the common mistakes is asking to file for a Chapter 11 bankruptcy or Chapter 13 bankruptcy. These two chapters are part of the United States’ law, and not part of the Canadian system.
Ontario Bankruptcy Laws
The main piece of legislation that provinces and territories in Canada follow is the Bankruptcy and Insolvency Act (BIA). The BIA covers elements of bankruptcy, along with other types of debt relief like consumer proposals and Division 1 Proposals. It is designed to regulate the sensitive financial process and protect honest debtors throughout the entire experience.
The BIA is not the only regulation influencing the bankruptcy process. Provinces and territories bring unique additions to the table. These provincial laws deal with bankruptcy asset exemptions. So, anyone filing for personal bankruptcy in Ontario will encounter different rules and regulations than someone filing in Nova Scotia, Saskatchewan or Quebec. This is why you have to do more than look into federal measures — you have to pinpoint your research on the province, too.
Citizens of Ontario will be subject to the Bankruptcy and Insolvency Act and the Ontario Execution Act in regard to their bankruptcy asset exemptions. Here are some of the examples of asset exemptions listed in the act:
- Up to $13,150.00 in value for items like furniture and appliances
- Up to $11,300.00 in value for tools that are necessary to earn income
- Up to $6,600.00 in equity in a single automobile
- There is no limit on the amount of clothing
- There are special exemptions for farmers
- Up to $10,000 Exemption for equity in your primary residence
These are completely different than other provincial laws. Alberta’s bankruptcy asset exemptions include up to $40,000 of equity in their primary residence. You can see how a quick internet search could confuse you and set you up with inappropriate expectations.
Top Misconceptions about Bankruptcy
Debtors come to licensed insolvency trustees with lots of misunderstandings about bankruptcy — not just about mix-ups with their country’s and province’s regulations. Since the debt-relief process can be stressful and demanding, they believe the consequences of the process will be disastrous. The ideas are either exaggerated or completely untrue. Here are some common misconceptions about filing for bankruptcy that many debtors believe and the real facts that you should know:
Misconception: You Will Lose Everything
When people picture bankruptcy, they often imagine repo men coming to lug their furniture, clothes and personal possessions away. They imagine sitting in an empty house by the end of the day.
As you can see from the list of exemptions in Ontario, you will be able to keep plenty of valuable furniture pieces, appliances and more. These personal assets can stay exactly where they belong. You will be asked to declare certain extremely valuable items on your Statement of Affairs for the creditors. So, if you have a piece of fine art, it may be contributed to your settlement.
Misconception: You Can’t Get Future Credit
Bankruptcy leaves a lasting mark. It sits on your credit report for several years after your discharge, and it can significantly bring down the rating. Debtors are worried about dealing with low credit scores for the rest of their lives because it can make it difficult to reach financial milestones like getting a mortgage, renting an apartment or buying a car. No one wants to carry around an unfortunate score forever.
While bankruptcy will sit on your credit report for several years, it doesn’t stay there forever. After your discharge, a record of the bankruptcy will stay on your report for six to seven years, depending on the credit bureau. Once that 6 to 7-year period is over, the information is cleared from the report.
If you’re worried about your credit report, you can sign up for credit counselling services with one of our licensed insolvency trustees. These services can help you with common issues like budgeting and responsible credit use. They will also make it much easier to rebuild your credit rating after completing your bankruptcy. The improved score will remove barriers with future decisions like buying a house, buying a car, applying for insurance and more.
Misconception: You Will Hurt Your Spouse’s Credit
One of the biggest money troubles that couples deal with is debt. According to a survey from the CIBC, two-thirds of Canadian couples entered their marriage or common-law relationship while they were in debt. Many of the respondents have only briefly addressed the ongoing financial problem and have not come up with clear plans for solving it.
The panic around money is understandable. The average person doesn’t want their spouse to help carry their debt load. And they don’t want their spouse to deal with any side-effects that come with debt relief options. It’s common for debtors to come to the insolvency trustee firm asking whether their romantic partner’s credit rating will be affected by their own bankruptcy filing.
When you file for personal bankruptcy, you don’t affect your spouse’s credit. Their credit is completely separate from this individual process. However, if they don’t file for bankruptcy, they are still liable for any outstanding joint debts.
Misconception: You Will Lose Your Home
One of the biggest fears that come with filing for bankruptcy is that you will lose your home. People don’t want to end up on their friend’s couch, or worse, on the street.
In reality, it’s incredibly unlikely that you will lose your home after filing for bankruptcy. Unsecured creditors may be entitled to some equity in your home beyond the exemption limits. In Ontario, up to a maximum of $10,000 of home equity is considered a bankruptcy exemption. If the equity exceeds $10,000, creditors are entitled to the equity, and you will need to make a settlement payable to the estate through the licensed insolvency trustee.
Misconception: You Can’t Pay for Anything
Debtors are afraid that they won’t have any money to go around after filing for bankruptcy. They will be too broke to afford anything beyond their necessities. They’re afraid that they will be putting their entire life on hold until they’ve been discharged from their debts. It will be miserable.
The truth is that the bankruptcy period will not be easy, but it’s not impossible for debtors to make it through. There are lots of tips that can help you enjoy your regular life without overstepping the boundaries of your income or the bankruptcy’s legal requirements.
For instance, people find it difficult to survive the holidays during bankruptcy because they feel pressured to spend beyond their means. According to the Retail Council of Canada, the average Canadian spent $675 on holiday presents alone. This doesn’t include other holiday expenses like food, decorations, parties and more.
To resolve this, you can be strategic about your spending. Pick bargain gifts or choose to make homemade ones. Don’t attend parties that you can’t afford. Make your expectations more realistic so that you don’t feel stressed or disappointed. If you’re ever feeling too restricted by your bankruptcy, you can ask your trustee how to improve your budget and make room for simple pleasures.
How Many Times Can You File for Bankruptcy?
Technically, you can file for bankruptcy more than once. It’s not an ideal situation, but it’s possible. To discourage recidivism, bankruptcy comes with more obstacles with every single filing.
The first time that you file, you can receive an Automatic Discharge after nine months. To qualify for this discharge, you will have to complete counselling from a licensed insolvency trustee. The discharge must be accepted by trustees, creditors and the Office of the Superintendent of Bankruptcy — if one of these disputes the decision, it does not go through. Surplus income will also extend the bankruptcy period from nine months to 21 months.
The second time that you file, you can receive an Automatic Discharge after 24 months. They have to meet the same qualifications: completed counselling, completed legal requirements, and no disputes toward discharge. Surplus income will also extend the bankruptcy period from 24 months to 36 months.
The third time that you file, you will not be eligible for an Automatic Discharge. You will have to attend a discharge hearing in Court, allowing the judge to decide whether you can be freed from your debts or not. The legal requirements attached to the bankruptcy process will be stricter than the previous filings.
Bankruptcy gets more challenging with every attempt. While you can go through the process more than three times, it’s not recommended.
Lots of clients take the “clean slate” that the discharge offers and stay on a steady path from that moment on. But, there are always exceptions.
There are Canadians that repeat bankruptcies throughout their lives — some have gone through the ordeal five separate times. They treat it like a simple solution instead of a last resort or a one-time remedy. Many licensed insolvency trustees see this trend of recidivism as troubling. They don’t want citizens to have relaxed attitudes about taking on heavy debt loads and then seeking out serious relief methods.
The entire aim of bankruptcy is to recover from financial trouble and to rebuild your life. It’s not meant to be a quick fix.
Is Bankruptcy Your Only Option?
You may be wondering is there an alternative to bankruptcy filing, or do you have to stick with this process? The good news is that there are other debt-relief options for people having money troubles.
If you’re not struggling with insolvency, you can get to a place of financial stability after undergoing credit counselling and learning effective budgeting techniques. You can visit a licensed insolvency trustee to get these practical services.
If you’re struggling with insolvency, you could file a consumer proposal instead of filing for personal bankruptcy. A consumer proposal is a legally binding agreement made between a debtor and their unsecured creditors. The proposal asks the creditors to accept a reduced amount of the total debts owed, making the repayment easier for the debtor to handle. When the majority of creditors agree, the debtor begins a repayment plan that lasts up to a maximum of five years. After the repayment period is over, the proposal is officially complete, and the unsecured debts are considered paid in full.
A consumer proposal isn’t always available. The method only covers unsecured debt (credit cards, payday loans, unpaid utility bills, etc.). And the total debt must be under $250,000, excluding the mortgage on your principal residence. If you have over $250,000 in debt, excluding the mortgage on your principal residence, you should go to licensed debt professionals in Toronto to see if you can file for a Division 1 Proposal.
A Division 1 Proposal is another alternative to filing for personal bankruptcy. It’s designed for insolvent individuals who owe more than $250,000 in debt, excluding the mortgage on your principal residence, and insolvent businesses with any unsecured debt. With the help of a licensed insolvency trustee, the debtor offers to pay a lowered portion of their total debt to their unsecured creditors. If the creditors agree to their terms, they begin the repayment plan — this plan does not have a limit of 5 years. If the creditors reject the proposal, the individual is automatically placed into bankruptcy.
There is a lot of information out there regarding bankruptcy, and not all of it will be useful or correct. Whenever you’re considering filing for personal bankruptcy or another type of debt relief, you should come to the experts for help. A licensed insolvency trustee from your local area will answer your questions, address your concerns and give you all of the information you could possibly need.