There are many reasons why an individual can collect a substantial amount of debt over any period of time. Without realizing it, large sums of debt can grow to a size that we never imagined. Perhaps you’re living under the pressure of tremendous debt but you don’t know how you’ll ever be able to pay it all off. It’s difficult but not impossible to eradicate levels of debt that seem overwhelming. The first thing you need to do is admit to yourself that you’re ready to make a change. Once you’re in the right mindset, you can start to focus your energy on freeing yourself from your burdensome financial obligations. In this article, we discuss the stages of filing for personal bankruptcy and ways to rebuild your credit.
It might be that you are like many Canadians across the country and you’ve come to accept living with debt as a simple reality of life. While everyone’s personal preference to what amount of debt they can handle will vary, it’s by no means “normal” to owe amounts of money that you can’t pay off.
If it feels like you’ve lost control over your finances and you need help to come up with a plan to tackle your debt, there is help available. While no one plans on filing for bankruptcy, it is more common than you might think. After all, bankruptcy still carries a stigma in social circles and people don’t really talk about the subject in casual conversation.
You’re Not Alone
Despite its negative connotations, bankruptcy does not equal “financial ruin.” You can attribute this stereotype to American depictions in the media. In fact, filing for bankruptcy in Canada is classified as a method of debt relief. It is meant to help, not punish, those individuals and businesses that cannot meet their financial obligations and need a fresh start.
According to recent surveys, approximately 100,000 insolvent Canadians turn to either bankruptcy or a consumer proposal to relieve their debt problems. While a consumer proposal is a great financial option for those who have a steady source of income and large amounts of unsecured debt, it isn’t necessarily always the best way to tackle debt. Every insolvency situation is unique to the individual, but there are a few common themes that point to bankruptcy as the best method of debt relief.
When to Declare Personal Bankruptcy
The specifics of your bankruptcy will depend on your personal financial situation and how it relates to the Bankruptcy and Insolvency Act. To formally declare bankruptcy, you need to team up with a Licensed Insolvency Trustee (formerly known as a bankruptcy trustee).
Bankruptcy trustees work as a liaison between the insolvent individual and the Office of the Superintendent of Bankruptcy, and it’s important that you team up with someone who you feel is empathetic and patient. Since it can take years to fulfil the duties of a bankruptcy, you could be in communication with your trustee for quite some time.
Financial stress due to debt might have led you to the question, Is bankruptcy right for me? Only a certified credit professional can offer you the advice you need to make an informed decision. As you research your options, however, here are some signs that bankruptcy is the right form of debt relief for you.
- A sudden loss of income or change in employment situation means that there is simply no way to pay the debts that you owe.
- You’ve reached the limit for your borrowing and your bank will not extend you a line of credit or offer any further financial support.
- The stress and anxiety from your financial situation are impacting your personal relationships, physical health, or mental health.
- Even if you are making payments towards your debt, you can’t keep up with how quickly the interest collects and you have no way of catching up.
- You rely mostly (or entirely) on credit and credit cards. Your debt exceeds your income and savings, meaning there is simply no money left for daily yet necessary expenses.
You’re Ready to File for Bankruptcy
If filing for bankruptcy, you’ll need to know about all of the rules and regulations that come with the process. While you don’t have to memorize the guide to filing for bankruptcy, it’s important that you educate yourself to the best of your ability so that you can make wise choices for your finances. Allow your trustee the opportunity to explain the details of the procedure with you even if you’ve already done your research — there may be some finer points that you’ve missed or updates to legislation that you don’t know about.
When you think that you’re ready to file for bankruptcy, make the time to write down all of your questions and concerns in a dedicated notebook. Bankruptcy is a serious decision that you’ll have to live with for quite some time, so it should not be taken lightly. Prepare our questions in advance before proceeding to the next step of the bankruptcy process, consulting with a qualified trustee in bankruptcy.
Consult with a Licensed Insolvency Trustee
You understand the severity of your debt situation and you need a professional to show you how to turn things around. It’s time for you to get bankruptcy help from the pros at David Sklar and Associates. A good trustee will want to make sure that you’re well informed before asking you to sign any paperwork. Refrain from signing any documents or making any commitments if you have questions that have yet to be answered.
To work with a skilled bankruptcy trustee and get help from any member of our dedicated staff, contact our team today to get started with a consultation on your options for debt relief.
Accept Your Insolvency
There are many emotions associated with going through the process of debt recovery, and in order to healthily process and work through your debt, it’s important to be present for this emotional journey. You might have started out by fearing, avoiding, or even denying the true extent of your debt up until a moment where you couldn’t ignore it any longer. There comes a point where you have to completely accept your debt situation in order to turn it around.
While acceptance might not be easy, it’s an emotional step you cannot skip when filing for bankruptcy. In order to hit the ground running and set your sights on bouncing back, you need to be willing to acknowledge your mistakes, learn from them, and set goals to improve for the future. Think of accepting debt as having two major steps. First, you have to give in to debt, and then you have to get on past it.
Prepare Your Documents
Once you’ve decided on the best form of debt relief for you, the next thing you have to do is work with your bankruptcy trustee to collect, compile, and complete all the paperwork and required government forms. You’ll need to prepare a Statement of Affairs and an Assignment of Assets and fill them out accurately and honestly.
The Statement of Affairs lists all of your assets, debt, income, and expenses and also contains personal information about yourself like mailing address, household size, dependents, marital status, and more. The Assignment of Assets is where you will go through your eligible assets and assign them to the creditors according to how much you owe and to whom.
Mandatory Bankruptcy Counselling
In order to be fully discharged after fulfilling the obligations of bankruptcy, the debtor must complete two mandatory financial counselling sessions with a Licensed Insolvency Trustee or a licensed credit counsellor. In these sessions, you’ll work with a counsellor to identify the causes of your debt before moving on to establish good habits for your financial future.
It’s helpful to identify the budgetary and non-budgetary reasons that led you to insolvency in the first place. In many cases, there is a combination of personal habits, a lack of financial education,
The mandatory bankruptcy counselling is not the same as general credit counselling. Depending on the specifics of a person’s debt, it’s possible to avoid bankruptcy altogether with the help of a credit counsellor. Because so much of a person’s financial decision-making during insolvency relies on good advice from a trustworthy and empathetic bankruptcy trustee, it’s essential that the trustee and the debtor have a good working relationship and communication with each other.
What Happens to Your Credit Score?
You’re already in a delicate situation as it related to your credit score, so it’s only natural to ask yourself: what does declaring bankruptcy do to my credit score? First bankruptcies in Ontario will appear on your credit report for six to seven years after you are finally discharged.
In the case of a second bankruptcy, the record will stay on your credit report for 14 years after discharge. Having this record on your credit report can make it difficult to borrow money in the future. It can be a serious financial hurdle for those who are looking to hit the ground running and rebuild their lives as best as they can when coming out of bankruptcy.
Rebuilding Credit After Bankruptcy
Your personal bankruptcy will have had a serious impact on your credit score, so rebuilding your credit after bankruptcy will require planning and commitment. If you stay focused on your long-term goals and follow some simple strategies for building and fixing a bad credit rating, it’s possible to recover quickly from the effects of bankruptcy on your credit.
One of the most important things you have to do after filing for bankruptcy is to pay your bills on time. Bad credit can creep up on you if you fail to make regular bill payments for services like hydro, cell phone service, internet, gas, etc. Just paying bills on time isn’t enough to fix your credit score, however, it’s a step in the right direction and a good signal to any potential future lenders that you are managing your money efficiently.
Depending on what led you to insolvency, you might be fearful of jumping back into the proverbial financial deep end by getting a new credit card. One strategy you can use is to apply for a secured credit card that you can use for minor, fixed expenses every month. You need to put down a security deposit that the credit card company will keep for up to two years and use if you fail to make your payments. Stay focused on your goal, however, and use your card strategically and sparingly. Every time your bill arrives, pay it in full and on time.
Think about your secured credit card like a gift card. You only have a set amount of money that you’re allowed to spend and you can’t spend any more than you can afford. This type of credit card use will be instrumental in rebuilding your credit score and repairing messy credit history.
Limit Your Loan Applications
You also have to exercise caution when applying for loans. It’s smart to shop around and try to get the best deal available if you’re looking for something like a sensible car loan. However, every loan application you make essentially “pings” your credit score, which means that multiple applications will have a negative impact on it.
If you are declined a loan once or twice, you need to wait at least six months before applying for another one. It’s best to space your loan applications as far apart as possible since the frequency of applications is factored into your credit score calculation in Canada.
Make Positive Financial Choices
Bankruptcy can certainly be a serious blow and it will take hard work and commitment to bounce back from the fall. Still, those who are really determined to not repeat the same mistakes will take the opportunity to develop healthier financial habits and closely monitor their use of credit moving forward.
To bounce back quickly from bankruptcy, you should get a secured credit card to work on improving your credit score. Even if you want to stay away from credit as much as possible, simply treat this credit card as if it were a gift card and always pay the balance in full. If you don’t have the liquid assets to pay off a purchase, then don’t make it.
Make regular financial audits and budgeting a part of your daily routine with the help of budgeting software and banking apps for your phone. You’ll get in the habit of monitoring your spending and can even set up automated savings and debt payments so that you can recover from debt easily.
There are plenty of resources to help you develop a healthy financial mindset and you can even join support groups to stay accountable to yourself and others. There’s a debt-free world out there waiting for you. Take the first step towards debt relief and you’ll be well on your way to financial freedom.