No one aims to become bankrupt, but 125,878 Canadians filed for personal bankruptcy in 2016. It’s projected that one in six Canadians will become bankrupt at some point in their lives. When you’re at the point of considering bankruptcy, it’s helpful to know you’re not alone. In fact, you’re in good company.
Filing for bankruptcy is a social security measure put in place to prevent people from drowning in their debt. If your debts are piling up and you have no hope of paying them back given your current circumstances, then filing for bankruptcy could be of great assistance in getting back on track.
Filing for bankruptcy is a major decision. Either you have to live with your debts and come up with an effective plan to pay them off or you have to live with the consequences of filing.
Here are some points to know if you’re thinking declaring bankruptcy is your only option. Bankruptcy should only be considered as a last resort as the ramifications of declaring will be carried with you for the next decade. Filing bankruptcy can be a lifesaver, however, for those who desperately need a fresh start and are at a loss as to how to get there.
1. There are two kinds of bankruptcy
Popular bankruptcy terminology like “chapter seven” and “chapter eleven” only pertains to the United States. In Canada, we only have two types of bankruptcy: personal and business.
Declaring personal bankruptcy allows individuals to wipe the slate clean of their debts and begin working their way back to good financial health. Those who are looking to declare personal bankruptcy must be considered insolvent, the criteria for which are:
- You owe at least $1000
- You have stopped or are unable to keep making debt payments
- If you sold your possessions at a fair market rate, the proceeds would not cover your debt
Personal bankruptcy can be a lifesaver if you are about to get ousted from your house.
If you are a business going into bankruptcy, you will fall under one of two types: small business and corporate. If a landlord is looking to seize your assets for lack of payment, the business is no longer viable. Or, if the business will be imminently closing and requires full disclosure of financials, declaring bankruptcy may be the smartest move.
2. There are consequences
Everyone knows there are consequences to filing bankruptcy, but what exactly are these consequences? First off, your credit score will be reduced to the lowest possible level for six years following your declaration. This will make it much more difficult to find a place to rent, receive a loan, find a job, or even secure a cell phone contract.
It’s easy to take for granted the advantages of having good or even fair credit. Once you’ve declared bankruptcy, you’ll be seen as a major liability for anyone putting their faith in your ability to pay.
You may also be required to liquidate your assets to pay back creditors. In many cases, you’ll be able to remain in your home, but if you need to relocate yourself and your family, that will be made much more complicated by your newly trashed credit score.
You’ll also need to turn over your personal information. It’s true what they say, that our accountants know more about us than our doctors do. Your entire financial situation will be laid bare for lawyers and creditors to assess. While it’s for the greater good, it can be very uncomfortable in the moment.
3. You won’t lose all your debts
Declaring bankruptcy removes the lion’s share of debt from your plate but expenses such as mortgage payments, alimony, court fines, and assault claims will remain attached to your name. It’s your responsibility to continue paying these debts even while you’re filing for bankruptcy.
4. Going bankrupt is expensive
Filing bankruptcy is a legal procedure, and there’s no such thing as a free legal procedure lunch. The costs, which come out to around $1,500, are taken from your liquidated assets. There are also ongoing expenses of credit counseling courses, which are mandatory.
5. Your spouse is safe
If your spouse has co-signed on loans with you, their credit score will be affected by your filing for bankruptcy. If this isn’t the case, however, and they’ve maintained their financial independence, they won’t be touched by your bankruptcy. It can be hugely helpful to have a spouse with good credit while you’re climbing out of bankruptcy.
Filing for bankruptcy is a huge decision, but chances are if you’re thinking about it, then the problem has already become unmanageable. That’s how debt tends to work; it creeps up over time, and before you know it, you’re barely treading water.
Bankruptcy is a lifeline for those who have run out of options and energy. The major consequences, primarily the reduction in your credit score, are definitely points to consider before filing. It’s good to know it’s an option, however, and that it’s never truly hopeless.
For more information on bankruptcy and personal finance, call Kevin Thatcher & Associates today at 1-866-719-8547 or contact us here.