Life is unpredictable. You could be doing just fine financially when you hit a bump in the road and swerve off course. Before you know it, you’re deep in debt and you’re not entirely sure how you’re going to fix it.
One of the potential solutions is filing for personal bankruptcy. It could help you slowly get out of the debt ditch and get back onto the road. But what is personal bankruptcy? How many times can you file for it? And how can you avoid it altogether? Read ahead to find the answers to these pressing questions.
What Is Personal Bankruptcy?
Personal bankruptcy is a form of debt relief. It is often considered a last resort for people who are insolvent (unable to pay back their debts). It typically involves the settlement of your assets with the help of a licensed insolvency trustee (formerly known as a bankruptcy trustee). The settlement will then be disbursed among creditors until the repayment period is over, and you are released from your debts.
Click here to find out information about filing for bankruptcy in Ontario so that you can learn who is eligible to apply, what are the stages of the process and what are the benefits to consider.
What Happens Every Time You File For Bankruptcy
1. Filing for Bankruptcy for the First Time
Someone filing for the first time is eligible for an Automatic Discharge from the bankruptcy after a period of nine months. To get an Automatic Discharge, the client has to complete all of their necessary counselling from certified bankruptcy counsellors and other legal requirements. Their approval also cannot be disputed by the Office of the Superintendent of Bankruptcy, by a trustee or by a creditor.
The nine-month period will be extended when a trustee finds that the client has surplus income. The government sets an income threshold based on family sizes. A client’s bankruptcy payments are determined by these income thresholds, allowing them to take care of debt while maintaining a reasonable standard of living. However, if they cross that threshold and bring in more money (surplus income), their rates will increase and their bankruptcy period will expand to 21 months.
With this discharge, a client will be legally released from paying the debts included in the bankruptcy. They will be encouraged to begin their recovery from this challenging time so that they can maintain a level of financial stability in the future.
You should know that personal bankruptcy will be noted on your credit report, even after your discharge. The consumer credit reporting agency Equifax will remove the bankruptcy from your report six years after you have been discharged. The reporting agency TransUnion will remove it from your report seven years after you have been discharged. So, it will take approximately six to seven years after a first-time bankruptcy to get a “clean slate.”
2. Filing for Bankruptcy for the Second Time?
With a second bankruptcy, the client will become eligible for an Automatic Discharge after meeting the same qualifications of attending necessary counselling, completing legal requirements and receiving no discharge disputes from related authorities.
The main difference from the first bankruptcy is that the client will only be eligible after 24 months — not nine months. And if the trustee discovers that the client has surplus income, they will have those 24 months extended into 36 months.
The credit report notice is also extended with a second bankruptcy. It won’t be wiped from the report until 14 years after the discharge. This is a significant amount of time that can impact financial decisions like renting an apartment, buying a house or buying a car.
3. Filing for Bankruptcy for the Third Time?
It’s possible to file for more than two, but it’s not ideal. A client filing for their third bankruptcy will not be eligible for Automatic Discharge. Instead, they will have to attend a discharge hearing in Court to explain their decision to the Judge, and then the Courts will decide if the client can be discharged from the debts they owe. They will have to deal with stricter conditions than their first and second attempts. It’s better to avoid repeating the process altogether.
What Are Common Causes of Bankruptcy?
Three common problems put people on the path to bankruptcy and financial instability: job loss, medical emergency and poor credit use. If you’re afraid that you’re driving on that risky path and you want to get off it, you should follow these solutions before contacting a trustee about bankruptcy.
1. Job Loss
Job loss is a difficult problem to avoid. You can prove that you’re a valuable employee by showing up on time, completing tasks and developing good relationships with coworkers, and you can still get a pink slip come Monday morning. There is no way to guarantee that your job will last forever.
People get fired or laid off for a variety of reasons that have nothing to do with their career ambitions or demeanour at the office. Maybe you work in a sector that depends on government support, and budget cuts have led to a dramatic loss of job opportunities. Maybe you work for a private company that promises to lay off workers because there is less consumer demand for the products. Or maybe you’ve signed on with a company that’s decided to switch gears by overhauling the entire staff to get a fresh start.
Unless you manage to get a new well-paying job immediately, your entire life will be shaken up by this development. How do you financially cope with this problem?
Figure out Compensation
The first thing that you should do is figure out what kind of compensation you get from your workplace. You could be owed one of these forms of compensation:
- Severance Pay: Compensation for employees that are losing their jobs through no fault of their own.
- Termination Pay: Compensation from an employer that doesn’t give you any advance notice that you are being terminated as an employee.
- Vacation Pay: Compensation for the vacation days that you did not take in a salaried position. It will be a small percentage of your annual pay.
If you’re not sure about what kind of pay you are owed, check your employment contract or handbook to confirm the terms of dismissal.
Consider Employment Insurance
Employment Insurance (EI) can pay you a percentage of your previous income to help you get through this rough patch. You should know that this is not a substantial amount. The payments are a maximum of $562 per week and are available for a limited amount of time, or until you get another job. You can receive EI for up to a maximum of 45 weeks — this depends on your region. The minimum payment period will be 14 weeks.
Build an Emergency Fund Ahead of Time
One way to make your recovery from job loss a little easier is to set up an emergency fund ahead of time. Even if you love your job and you’re sure that you’re going to keep it for years to come, it’s always good to have a safety net to fall back on.
Financial experts recommend that you should strive to save three to six months of expenses in your emergency fund. That way, you can afford to pay the bills, make rent and get groceries when you don’t have a paycheque to rely on. Put the funds in a separate savings account so that you don’t use it until it’s completely necessary.
2. Medical Emergency
Another common problem that leads people toward the path of bankruptcy is a medical emergency. Strokes, heart attacks, serious injuries — these are all terrifying scenarios that require immediate medical attention and long-term recovery. While OHIP guarantees that you don’t have to plunge into debt for appointments and surgeries, you can still go deep into debt because of a medical emergency.
For one, OHIP offers residents coverage for general healthcare costs — it doesn’t cover everything. If you don’t have a reliable benefits’ plan through your employer, you have to foot the bill for services like dental, physiotherapy or psychotherapy.
Your workplace may not offer you a generous amount of paid leave — if any at all — meaning you miss out on a significant amount of income until you recover. You have to consider hidden expenses like childcare, travel costs or hospital parking fees that can quickly eat through your savings. What can you do to avoid this situation?
The first thing you can do is try to take good care of your physical health. Eat a balanced diet, drink plenty of water, exercise regularly and get enough sleep every single night. Try to break unhealthy habits. For instance, smoking cigarettes increases your risks of developing heart disease, stroke, lung cancer and a long list of other illnesses. Quitting the habit can effectively reduce your chances of medical emergencies in the future.
However, you can’t completely avoid anything from going wrong with your health. Sometimes it’s beyond your control.
Try Private Insurance
Lots of people take out private insurance plans through their workplaces. If your workplace doesn’t provide this option, you can still go to a private insurance company to get health benefits that your OHIP will not cover. This can really come in handy after dealing with a medical emergency.
Build an Emergency Fund Ahead of Time
You don’t want to be sitting in a hospital bed and worrying about money. Having cash reserves set aside can be a great way to cover expenses from your medical emergency and necessary recovery.
It’s important to acknowledge that it can be extremely difficult to build up an emergency fund while you’re paying off debt. Just remember that even having a few hundred dollars sitting in the bank can offer some degree of relief. Any savings can help.
Poor Credit Use
Your credit rating is in the lowest category. Your credit cards are maxed out. You have been at a cash register and swiped your card, only to have your purchase denied. These are all signs that your credit use is not good — and that you’re setting yourself up for a lot of debt. If you’re not careful, you could stride right onto the path toward bankruptcy.
Better Credit Habits
Luckily, poor credit use is a problem that’s much easier to avoid than a job loss or medical emergency. Here are some of the things that you can do to improve your credit quickly:
- Use your debit card or cash when going shopping
- Pay your bills on time
- Don’t take out cash advances
- Don’t apply for more credit cards
- Always check your limit
- Start a responsible budget
- Try to tackle the debt as soon as possible
You should consider getting credit counselling in Toronto to learn how to improve your credit and slowly resolve your unsecured debt before it gets out of control. Our licensed insolvency trustees can help you learn how to accomplish financial goals like how to rebuild your credit rating and how to make an effective budget.
If these preventative measures don’t work and you still end up deep into debt, you still have another solution to try before filing for personal bankruptcy.
An Alternative Form of Debt Relief
There is another debt relief option out there: a consumer proposal. A consumer proposal is a legally binding agreement between you and your creditors that allows you to pay off a lowered amount of the total debt you owe in a maximum of five years. If your proposal is approved, you get to maintain your assets, including your car and house. Surplus income won’t impact your payments. And it’s not commonplace for employers to ask if you have filed a consumer proposal on job applications.
So, you can see why people are turning to this debt relief method before looking at bankruptcy. Click here to see how bankruptcy trends in Toronto show consumer proposals are growing more popular, while bankruptcy rates are slowly shrinking. Maybe you are one of the residents who will continue that pattern.
You can file for bankruptcy once. You can file for bankruptcy twice. You can even do it three times, but some drawbacks come with the process — and those drawbacks get harsher with every single filing. You’re better off following the tips from this article and skipping the path to bankruptcy altogether.