The Reality of Bankruptcy: What You Should Know When Considering Personal Bankruptcy
19 Sep 2018
When you hear or see the word “bankruptcy”, what’s the first thing that comes to mind? Do you think of the literal meaning of bankruptcy, which is a formal or legal process that resolves overwhelming debt? Or do you immediately think about how the word makes you feel: embarrassed, guilty, ashamed, or even afraid.
If bankruptcy is a legal process that can help honest, but unfortunate, people get relief from their debt, why is it still viewed as shameful or embarrassing? Two reasons. Most people don’t understand the bankruptcy process and its purpose, and the word itself has a negative stigma attached to it in our society.
There is generally two types of stigma around personal bankruptcy: social stigma and emotional stigma.
The social stigma surrounding bankruptcy generally comes from the negative views of family and friends who, with the best intentions, try to deter you from bankruptcy without fully understanding the process and its positive impact. You can try to minimize this stigma by bringing your loved ones with you to your free initial consultation. Not only can they be present for support, but you will have a second set of eyes and ears to take in the information which you might find overwhelming.
The emotional stigma around bankruptcy is self-generated through feelings of being judged or from the guilt of not being able to pay back your debt. These are natural and very common feelings to experience, and it’s important to know you aren’t the only one feeling this way.
IS IT TIME TO CONSIDER BANKRUPTCY?
If you can come to terms with the stigma of bankruptcy, the next step is to decide whether or not it is time to consider bankruptcy to relieve your debt. This will depend on your financial situation. Filing for bankruptcy should be a last resort. A good starting point in determining whether it is a debt solution you should consider is to ask yourself “have I tried all other options to resolve my debt?” These options could include:
- Making lifestyle changes to cut out or reduce areas of high spending in your monthly budget.
- Selling or liquidating non-essential assets and using those proceeds to pay down your debt.
- Taking advantage of available equity in real estate you own by consolidating unsecured debt with higher interest to a lower interest rate under a home equity line of credit or second mortgage. This requires the discipline to stop using your credit cards and to ensure your debt doesn’t continue to grow while paying off the refinancing.
- Consolidating debt at a lower interest rate through a consolidation loan or tackling credit card balances through transfers at a 0% introductory interest rate over a 6 or 12 month period.
- Negotiating with creditors to come up with a mutually acceptable arrangement to allow you to meet your monthly debt payments.
- Determining if a Consumer Proposal is an option. This alternative to bankruptcy allows you to make an offering to your creditors to repay of a percentage of your debt over 5 years, either in monthly payments or lump sums. If they agree to it, your offering is legally binding and considered to be full and final settlement of your debt.
If you’ve exhausted the above options, have lost the ability to service your debts, are experiencing increased pressure to collect from your creditors, or you wages are being garnished, bankruptcy may be your only option.
THINGS YOU SHOULD CONSIDER BEFORE FILING FOR BANKRUPTCY
- Some assets may be protected under provincial law. In Canada, each province has a set of rules that determines which assets you can keep if you file bankruptcy. These are called “Exempt Assets”. For example, in Alberta, the Civil Enforcement Code allows you to keep your principal residence if the equity doesn’t exceed $40,000. You can also keep your vehicle if you can continue to make your car loan payments. If you have assets that are not exempt, your Licensed Insolvency Trustee is required to recover the value of those assets for the benefit of your creditors. Remember, your creditors will have to write off your debt, so giving up non-exempt assets is a fair exchange.
- Your wages or income are protected. Once a bankruptcy is filed, creditors can no longer seize your wages or income.
- Bankruptcy will negatively impact your credit rating. The credit bureaus in Canada, Equifax and TransUnion, will keep note that you filed for bankruptcy on your credit report for six or seven years (province dependent) after you’ve been discharged. This period increases to 14 years for a second bankruptcy filing. It’s a misconception that having a good credit rating alone measures successful financial management. A person can have a good credit rating but still carry high debt levels and live paycheque to paycheque.
- Not all debts will be wiped out. These include student loans if you’ve stopped being a full or part time student within seven years of filing a bankruptcy, outstanding child or spousal support, court imposed fines, debts arising from fraud, misrepresentation or embezzlement and civil assault claims.
- You won’t be able to use your credit cards. All credit cards will be turned over to your Trustee at the beginning of you filing.
- You must complete two financial counselling sessions. Determining and acknowledging the root causes of insolvency is a critical step inimproving poor money management. The bankruptcy process should be a learning experience and promote positive change in the way you handle your finances in the future.
If you are still torn about the decision to explore the advantages and disadvantages of filing for bankruptcy with a Licensed Insolvency Trustee, try to view the experience as an opportunity for a financial fresh start. Filing a bankruptcy is a tough decision but it might be the best solution for getting you on the path towards debt relief. To learn what options are available to you, speak to one of our debt professionals about bankruptcy and other smart debt solutions.