You’re insolvent (unable to pay your debts), and you’re considering filing for personal bankruptcy. The only thing that is stopping you is that you don’t know how. Who do you call? Do you need to hire a lawyer? What will happen when you file? Read ahead to get all of your questions about personal bankruptcy answered and find out why it might be your best debt relief option.
Do You Need to Hire a Lawyer?
Filing for personal bankruptcy is a serious decision that should never be taken lightly. The process is governed by the Bankruptcy and Insolvency Act, and it involves more administrative hurdles and legal scrutiny than other debt relief strategies. Naturally, it’s easy to assume that you would need to hire a lawyer to get through this experience. But that’s not true.
Lawyers are not necessary for filing bankruptcy. In fact, they are not legally allowed to file or administer bankruptcies in Canada. The only authorities that are legally allowed to file and administer bankruptcies are licensed insolvency trustees (formerly known as bankruptcy trustees). LITs are licensed and regulated by the government through the Superintendent of Bankruptcy. This guarantees that LITs have the necessary skills and knowledge to ensure that debtors get the help that they really need.
There are rare occasions when a debtor will need to hire a lawyer — this is less likely to happen with personal bankruptcy cases than it is with corporate bankruptcy cases. A scenario where a debtor may want to hire a lawyer as an advocate is if a creditor dispute’s their Discharge, and they need to participate in a hearing.
You do not need to anticipate this problem ahead of time. Your licensed insolvency trustee will be your primary advisor throughout your bankruptcy and will let you know if you should consider getting additional legal support.
What Is Personal Bankruptcy?
Before getting into the details, you should know the basics of bankruptcy. Personal bankruptcy (as opposed to a corporate bankruptcy) is a form of debt relief for individuals who owe more money than they can afford to repay. If you owe more than $1000 and you can’t repay that amount in a reasonable manner, then this could be a way to resolve your debts and get necessary relief.
By filing for bankruptcy, you declare to the Courts and your creditors that you are insolvent. This declaration is followed by the settlement of your assets. It’s important to know that Ontario has several exemptions for assets like clothing and furniture — these will not be used in the settlement. The assets are then distributed to your creditors as a form of repayment. To ensure that you do not repeat the financial pattern and backslide into insolvency again, you will be required to complete credit counselling sessions.
If you complete all of your bankruptcy requirements and receive no objections from your licensed insolvency trustee, creditors or the Office of the Superintendent of Bankruptcy, you will be granted an automatic and absolute discharge as early as 9 months after you file. Your debts to your creditors will be considered cleared. If there are any objections from the related authorities, you will have to attend a court hearing. They will decide which of the following discharge orders you will receive:
- An Absolute Discharge: You are released from the requirements to pay the debts covered in your bankruptcy.
- A Conditional Discharge: You are required by the Court to perform more actions or make more payments to your estate before receiving an “Absolute Discharge.”
- A Suspended Discharge: The date of your “Absolute Discharge” is pushed to a future date.
- A Refused Discharge: You are denied an “Absolute Discharge.”
If you want to know more about what to expect after bankruptcy, you should click the link. You should also explore our blog for useful articles like “A Guide to Bankruptcy Recovery” and “How Often Can a Person File for Bankruptcy?”
Is There Another Debt Relief Option?
During your first consultation, your licensed insolvency trustee will look at your financial situation to see what debt relief strategy is the right one for you: a consumer proposal, a division 1 proposal or bankruptcy. Looking into personal bankruptcy services is considered the last resort for most clients. It’s usually accepted after every other option has been exhausted or made unavailable.
A consumer proposal is a legally binding agreement made between you (the debtor) and your creditors. The purpose of the proposal is to pay a portion of your total debts owed, making repayment much more manageable and avoiding bankruptcy. With the help of the licensed insolvency trustee, determine how much you can feasibly afford in repayments and how long you will do the repayment plan (the maximum term is 5 years). Once those details are covered, your trustee will file the proposal with the Office of the Superintendent of Bankruptcy and then send it to your creditors.
Your creditors have 45 days to accept or reject your proposal. If the majority of the creditors agree to your terms, then the proposal is accepted and goes forward. If the majority of the creditors disagree with your terms and reject the proposal, you have two choices: you can work with the trustee to modify the proposal terms and resubmit it, or you can file for bankruptcy.
To qualify for a consumer proposal, you need to owe less than $250,000 (excluding the mortgage on your primary residence) and be unable to pay that debt back in a reasonable manner. If you owe more than $250,000 (excluding the mortgage on your primary residence), then you could file for a Division 1 Proposal.
A Division 1 Proposal is fairly similar to a consumer proposal. It is also a legally binding agreement made between you (the debtor) and creditors. The creditors and the Court need to accept the terms of the proposal for it to go forward. If the required proportion of creditors or the Court reject the terms, then you are automatically put into bankruptcy. If you fail to honour the terms after the agreement is accepted, the creditors or the trustee can petition the Court to annul the proposal — this would also put you into bankruptcy.
The reason why trustees recommend that you try a consumer proposal or Division 1 Proposal first is that their side-effects are less severe than with a bankruptcy. With either proposal, you get to maintain all of your assets. Your credit score tends to not take such a strong hit. An increase in income does not change any of the proposed terms. These are just some of the advantages that the debt relief strategies bring.
Contact the licensed trustees at David Sklar & Associates to see where you stand and what strategy will work best for you.
Some Things about Bankruptcy That You Should Know:
Insolvency Rates Are Rising
The insolvency rates in the Greater Toronto Area have been rising. In November 2019, the number of personal insolvencies in Canada grew by 8.9% — with Ontario contributing the most filings out of all of the provinces and territories. Financial experts at the time expected the pattern to continue into 2020, predicting more filings across the country.
The Office of the Superintendent of Bankruptcy (OSB) found that Greater Toronto saw over 1,500 insolvencies by February 2020. Consumers represented the majority of those filings, making up 1,485 out of the 1,523 total. That’s an 18% rise in filings within a year.
The climbing rates are attributed to several factors:
- Higher costs of living
- Higher rates of credit card debt and delinquencies
- Stagnant wages
- Interest rate hikes
What the financial experts did not predict in 2019 was a pandemic that would rattle the globe. COVID-19 is expected to increase the number of insolvencies across the country, especially in the Greater Toronto Area.
COVID-19 Will Increase These Rates
Many residents of the Greater Toronto Area were already struggling with debt and financial insecurity before COVID-19. With the introduction of an unprecedented pandemic, these problems only got worse.
Lots of people lost their main source of income because of safety measures (social distancing and non-essential business closures) and profit losses. In May 2020, Statistics Canada revealed that the province of Ontario lost 1,092,000 jobs since February. The staggering number pushed the provincial unemployment rate to 11.3%. The majority of the job losses were from the wholesale/retail trade sector and from the accommodation/foodservice sector. So, thousands of store managers, cashiers, restaurant servers, hosts, cooks and other employees found themselves out of work in a matter of months.
The Association of Chartered Professional Accountants of Canada found that 1 in 3 Canadians live from paycheque to paycheque and suffer from income volatility. So, with no emergency funds or nest eggs to rely on, people across the country found themselves panicking about their finances the moment that they lost their jobs. This explains why millions of people applied for the government’s emergency COVID-19 aid, CERB (Canada Emergency Response Benefit) since it was first released in April 2020. CERB offers applicants $500 per week for up to 16 weeks, which has now been extended to 24 weeks.
Even with CERB in the works, Toronto residents are still having trouble making ends meet. Rent in the city is notoriously high. Far too many people are debating whether to pool their benefits in order to cover the monthly essential, or risk upsetting their landlord so that they can save for other essentials like food and utility bills. Other Torontonians can’t afford to make their rent payments during COVID-19 because they can’t qualify for the government program or Employment Insurance.
The financial insecurity will inevitably lead to more insolvency filings in the future. The severity of the rates depends on how long the government will continue to offer COVID-19 financial support to people out of work, how quickly the economy recovers and when a vaccine will be readily available to the public.
Bankruptcy Is Not Shameful
Unfortunately, there is a stigma that surrounds financial trouble. People would rather struggle in silence than admit that there is something wrong and that they need help to get to a financially stable place. Some go so far as to hide their debts from their friends, family and romantic partners, hoping that no one will notice them stress about their bills or ignore collection calls. Going to a licensed insolvency trustee to file for a consumer proposal — or worse, filing for personal bankruptcy — is the last thing they want to do. Doing that will open them up to judgment and shame.
It’s important to know that bankruptcy is not a moral failing. It’s a last resort relief option available to Canadians who really need it. Going through the legal process will be much better than carrying around debts for the rest of your life. It can give you a fresh start after dealing with so much financial stress.
Most of your fear of bankruptcy comes from misinformation. Click here to link to see bankruptcy myth and facts and find out the truth about this debt relief strategy. Getting informed will help you get a better perspective about this option and disperse the emotional baggage that often comes with it.
And, if you’re still anxious about filing for bankruptcy, financial experts believe that COVID-19 could change debt shame altogether. Since so many people are being thrown into financial insecurity through no fault of their own, they’re more likely to be empathetic and understanding when someone else seeks professional help. This could be a silver lining in a very challenging time.
David Sklar & Associates:
Residents of the Greater Toronto Area have had their lives turned upside-down by the pandemic of COVID-19. Here at David Sklar & Associates, we understand that many residents have been thrown into financial instability because of this health crisis and are concerned about what to do next. If you need financial help, we are still here for you. We offer over-the-phone consultations and electronic document signing so that you can access our services from the safety of your home. We want to encourage our clients to prioritize their health as best as they can during these uncertain times.
Personal bankruptcy doesn’t have to be a grand mystery. Get informed by reading our website and blog and by asking our experienced licensed insolvency trustees for help. Learning the answers to your questions could make this debt relief option a lot less intimidating.