Filing for bankruptcy is a solution some people take when their debts are beyond manageable. It is a way of sort of clearing the slate, however it is not a decision to be taken lightly as there are consequences that result from a bankruptcy claim.
Here are six things anybody considering bankruptcy should know before taking the leap.
1. Talk to a Licensed Insolvency Trustee
Licensed Insolvency Trustees are trained, licensed professionals who are specialized in dealing with these kinds of financial situations. The first step is to set a consultation where the LIT can assess the situation and see if bankruptcy is, in fact, the best option.
Then the LIT will either support the bankruptcy process, or make alternative suggestions that might better suit the client.
2. Requirements for filing bankruptcy
Anyone can file for bankruptcy as long as they have at least $1,000 of debt where the debt is greater than the sale value of the person’s assets. They also must be incapable of keeping up with the payments on the debt they have. Checking these three requirements for bankruptcy is called a solvency test. If someone tests insolvent, it means they have met all three requirements and are therefore eligible for bankruptcy.
3. Debts that can be included in the bankruptcy
The most common debts that bankruptcy can absolve is credit card debt and most unsecured debts. Unsecured debts are where the creditor doesn’t have collateral on your debt meaning they can’t repossess items if you don’t pay it.
Tax debts with Revenue Canada are included in the bankruptcy as well as student loans in certain cases. For student loans to be included in the bankruptcy, the person going bankrupt has to have been out of school for at least seven years. Anything less than seven years will still need to be paid back.
The bankrupt person does not get to choose which debts are involved in the bankruptcy, all of them are taken into account. But some debts do not get absolved during bankruptcy like child support debts.
4. Length of bankruptcy
The actual length a bankruptcy lasts can change depending on a number of factors which include having a surplus of income, whether or not the bankrupt person has been bankrupt before, and whether or not the bankrupt person has completed all of the required duties.
After nine months, barring any of the above factors, most bankruptcies are eligible for an automatic discharge. However, this discharge can be denied and the bankruptcy extended upon court order.
5. The cost of going bankrupt
A bankrupt person loses all assets except for those that are exempt according to the bankruptcy exemptions which have been set. These include things like a car, the equity on a house, trade tools, farm land and all relevant equipment, supplies and animals, clothing, furniture, and food.
Any surplus income, as decided by legislature according to family size, will be taken. Bankruptcy will also require the payment of court fees and all administrative and other fees as well as paying the LIT in charge of the bankruptcy.
Bankruptcy also means the bankrupt person will not receive any money coming in that is extra to their income such as inheritance, lottery winnings, or any tax credits.
6. Do not feel guilty
Bankruptcy is normally the result of a change in circumstances. It is often the result of using credit with the intention of repaying it, and then ending up in a situation where that becomes impossible.
Choosing bankruptcy as an option is not something to feel guilty of, it is a financial decision people make when necessary for them.