When the bills start to pile up and you’re not sure how you’re going to keep paying them, it may be time to consider insolvency. Filing bankruptcy helps you clear the slate and start fresh. It’s a mechanism for breaking the debt cycle and setting the needle back to zero when you can’t keep up with debt payments and bills.
The debt cycle can make keeping up with regular expenses harder and harder. While there are many reasons people wind up in debt, the pattern often starts similarly enough: you put more money on your credit card than you can afford to repay, and you wind up carrying a balance. It may have been a mistake, the result of lost income, or the effect of a surprise expense, but the result is the same. Now you have to start paying interest, and that eats into the money you have available next month.
Whether it happens quickly or over time, the problem can get out of control to the point that you’re juggling credit card bills, car loans, utilities, lines of credit, and more, with no way out in sight.
That’s when Canadian debt professionals can help. If you truly cannot keep up with your bill payments, or it would take you an unduly long time to pay back all your debts, it’s time to talk to us. A Licensed Insolvency Trustee will walk you through your options and work through your concerns about insolvency.
Should You Pay Your Bills Before You File Bankruptcy?
Your financial situation has become untenable, and you’ve decided to file bankruptcy. Should you keep paying bills that you hope to discharge anyway? It depends on what kind of debt the account is.
It may be all right to stop paying certain kinds of unsecured debt before bankruptcy, such as:
- Credit card bills
- Payday loans
- Lines of credit
Since these debts will be discharged, you may be better off saving the money to repay obligations that can’t be discharged. These include secured debts, where the creditor can repossess the asset if you fail to keep up with payments or obligations like spousal and child support.
It’s important to remember that bankruptcy is for honest debtors who find themselves unable to repay their creditors. If there is evidence that you took advantage of the system, such as borrowing large sums immediately before filing, you may not be able to file bankruptcy or discharge those particular loans. Even preferential repayments, where you repay personal loans from friends or family while ignoring other creditors, can be an issue. Preferential payments may even be “undone” in the bankruptcy process.
Will You Have Any Money During Bankruptcy?
One of the worries we hear about most often from individuals in financial stress is that they won’t have any money during or after bankruptcy. Going through bankruptcy will be difficult, and money may be tight, but bankruptcy laws protect a wide range of assets and your income, even if you have to give up some of it to the bankruptcy estate.
Exemptions include personal belongings like clothing, household furniture and appliances, tools and equipment, RRSP savings contributed more than 12 months before you file and equity in your principal residence and vehicle.
Whether you have to give up any of your income to repay your creditors depends on how much money you earn and the size of your household. You will have to pay 50% of any income earned above a certain threshold, and these are called surplus income payments. While surplus income payments may mean you’ll have to live frugally, you should be able to keep up with your bills and daily necessities.
Considerations for Different Types of Bills
Not all bills are created equally, and there may be different repercussions depending on which accounts you fall behind on. Some types of debt can be included in bankruptcy while others can’t. This is an important factor in deciding how to approach them when you’re experiencing financial duress.
One of the benefits of filing for bankruptcy in Ontario is that it can give you the breathing room you need to keep up with the most important bills in your life, such as your mortgage or rent while giving you relief from dischargeable debts like credit card bills and payday loans.
These are some of the considerations you should keep in mind when deciding what to do with different types of debt before, during, and after bankruptcy.
#1 Car Loan Payments
Aside from your home, your car is likely one of the most expensive purchases you’ve ever made, and the ongoing maintenance and loan payments can be a lot to handle when money is tight. The average cost of car ownership is between $8,600 and $13,000 a year in depreciation, interest payments, insurance, gas, parking, and car repairs.
It can be hard to keep up with all of those expenses, and skipping a car loan payment may be a choice you have to make. Missing that payment will hurt your credit history, but most importantly, the lender can repossess the vehicle if you stop making payments. Most car repossessions take place after two to three months without payment.
If you’re worried about losing your vehicle during bankruptcy, you should know that one vehicle is generally protected. The law recognizes that many people need their vehicles to get to work and run essential errands.
But you may also want to consider giving up your car through voluntary surrender before you file bankruptcy. If the vehicle is too expensive and you can find a cheaper alternative, or you can rely on public transportation, you can voluntarily surrender your car to the lender. The depreciated value of the vehicle is knocked off your loan, while the remainder becomes an unsecured debt that can be discharged in bankruptcy.
When you owe the hydro or gas company, those are unsecured debts that can be paid off in bankruptcy, but you may want to think twice about not paying these bills. Filing bankruptcy on your utility provider can leave you in a difficult position.
Utility providers can cut off service if they’re not paid. They may refuse you service and force you to go to a competitor, or they may require you to make a large deposit or pay in advance. In regions with only one utility provider, they cannot refuse you service, but they don’t have to provide the service on a credit basis.
You can save yourself problems down the road by keeping up with your utility bills before filing for bankruptcy, if at all possible. However, they will also be cleared in the bankruptcy process.
#3 Phone & Internet Bills
Canada has some of the most expensive cellphone and internet bills in the world, and keeping up with them can be a challenge. Unfortunately, telecommunications companies are not obligated to continue providing service the way public utilities are. In fact, it’s common practice for cellphone companies to run credit checks on consumers before they enter into a new contract. You may not be able to change your cellphone plan with bad credit unless you can buy a new phone outright. Otherwise, you may be better off keeping your original contract until your credit improves.
#4 Student Loan Payments
Student loans can hang over your head for years. On average, it takes most students 10 years to repay their student loans, and the average student debt is around $28,000.
Missing student loan payments will hurt your credit, and you may not be able to include them in bankruptcy proceedings. Student loans are not eligible to be discharged in insolvency until seven years after you were last a student, either part-time or full-time, though there is a hardship provision that can make you eligible for early discharge.
If you default entirely on your student loans, the debt may be passed to the CRA for collection. The CRA has broad powers to collect, including the ability to freeze your bank account, withhold tax returns, and garnish your wages.
The best thing you can do if you’re struggling with student loan payments is to explore repayment assistance plans offered by the federal government and its provincial counterparts.
Repairing Your Credit After Bankruptcy
It can be difficult to qualify for loans after bankruptcy because of the hit to your credit score. Part of rebuilding that score is making sure you pay your bills on time. Every time you miss a payment or pay late, it’s reflected in your credit history. But as time goes on, if you consistently pay your bills in full, your credit score will rise. This will help you qualify for loans in the future, whether you’re looking for a credit card or eventually applying for a mortgage.
Before filing bankruptcy, there are some bills you should still keep up with. During bankruptcy, you should still have enough money to keep up with your essential expenses. Once you get a fresh start, you can make the most of it by budgeting to stay on top of your bills all the time.
If the bankruptcy process still feels intimidating, don’t worry. Get in touch with debt counsellors in Toronto who will walk you through every step of the way. Bankruptcy is your chance to start fresh. We help you find relief.