Life During Bankruptcy in Canada: What to Expect, Costs, Pros, and Cons
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By Bromwich+Smith Staff | 1115 words | Reading Time: 5 minutes and 34 seconds | Date: 2023/11/28
Bankruptcy is a debt relief program that offers a fresh start for Canadians who are overwhelmed by debt and unable to pay their creditors. There has long been a stigma around bankruptcy, causing most of us to avoid it at all costs. This blog provides an in-depth look at life during bankruptcy in Canada, covering what to expect, the associated costs, and the pros and cons of this financial decision.
What to Expect During Bankruptcy in Canada
Filing for Bankruptcy: While filing for bankruptcy in Canada is a legal process, it will always start with a conversation. The first step is to contact a Licensed Insolvency Trustee (LIT) firm, like Bromwich+Smith. Often, your first contact will be with a Debt Relief Specialist (DRS) who will get to know you and your financial situation, review all the available options and help you decide which direction is best for you.
Protection: Once you file for bankruptcy, an automatic stay of proceedings comes into effect, meaning that your creditors cannot take any legal action to collect their debts . All phone calls, and letters must end and if your wages have been garnished, that must also stop. It can take time for this information to be fully updated in all creditors’ systems. If you receive a call from a creditor, make sure to answer the phone and tell them that you have filed a bankruptcy. It will make the process easier if you give them your LIT firm name and phone number, as well as the date of your insolvency and estate number. It is important to provide your LIT with the name and phone number of any creditor that contacts you, along with any account or reference number.
Asset Evaluation: Because bankruptcy is meant to help Canadians rebuild their lives, each provincial government has identified items and values that are exempt from the bankruptcy. Your other assets, such as your house, car, and personal possessions, will be assessed to determine if they can be sold to repay your creditors. Your LIT will work with you to manage this process.
Monthly Payments: As part of your filing, there will be a “surplus income” calculation based on your income, family size, and applicable government guidelines. If you receive a surplus income over the course of your bankruptcy, you will be required to make monthly payments to your LIT.
Credit Counselling: The bankruptcy process includes two credit counselling sessions which aim to provide you with financial management skills to avoid a similar situation in the future. You will talk about a variety of topics, and you will be provided tools to set you up for success. While completing these sessions is a requirement of the bankruptcy process, they are also a great way to brush up on your financial knowledge.
Credit Report Impact: Late and missed payments are reported on a credit report, generally having a negative impact which will affect your ability to access the best rates and terms for credit and loans. Bankruptcy will also have an immediate impact on your credit score, however the bankruptcy will end shortly, and you can rebuild your credit over time.
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The Costs of Bankruptcy in Canada
There are fees associated with filing bankruptcy which are defined as part of government regulations. There are circumstances that could reduce, or increase, the amount you are required to pay and how that amount is paid.
Filing Fees: There are government-defined fees associated with filing for bankruptcy which cover administration cost and expenses.
Trustee Fees: Licensed Insolvency Trustees also charge fees for their services, which are regulated through the Office of the Superintendent of Bankruptcy and are typically deducted from the funds collected from the sale of non-exempt assets or any surplus income payments you make. The current cost for filing a first-time bankruptcy with Bromwich+Smith is $1800. If assets or surplus income is insufficient to cover these fees, you have the ability to pay $200 monthly or pay the full amount upfront.
Proceeds from Non-Exempt Assets: Some non-exempt assets may be sold to pay your creditors and fees. The value of these assets can significantly reduce your overall costs.
Surplus Income Payments: If your income exceeds the government-set thresholds (see Item 4 above), you will be required to make surplus income payments. The amount of these payments is determined based on a formula outlined in the Bankruptcy and Insolvency Act.
The Pros and Cons of Bankruptcy in Canada
Pros:
Debt Relief: Bankruptcy provides a legal way to eliminate or reduce your debts and gives you a fresh financial start.
Protection from Creditors: Filing for bankruptcy immediately halts creditor harassment, garnishments, and other collection actions.
Asset Protection: Certain assets, such as essential personal items and some equity in your home, may be protected from liquidation.
Single Monthly Payment: Bankruptcy establishes a structured repayment plan, making it easier to manage your financial obligations.
Credit Rebuilding: While bankruptcy negatively impacts your credit score, it is possible to rebuild your credit over time with responsible financial management.
Cons:
Credit Impact: Bankruptcy remains on your credit report for six years, which may affect your ability to obtain new credit with the best rates and terms during that period.
Asset Loss: Depending on your financial situation and the applicable exemptions in your province, some assets may be sold to pay your creditors or fees.
Bankruptcy in Canada is a financial solution for those facing overwhelming debt. While it comes with costs and some consequences, it also offers debt relief and protection from creditors. Before deciding, it's crucial to consult with a Licensed Insolvency Trustee who can provide personalized guidance on your specific situation. Additionally, exploring alternative options, such as a Consumer Proposal, should be considered to ensure you make an informed choice regarding your financial future.
Bromwich+Smith has a number of debt relief strategies to help you regain control of your finances and get your life back on track. Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at 1.855.884.9243, Live Chat or you can request a call back at contact us page. We want to see you flourish!
FAQ Related Life During Bankruptcy in Canada
1: What is the first step in filing for bankruptcy in Canada?
Contact a Licensed Insolvency Trustee (LIT) firm, like Bromwich+Smith. Initiate a conversation with a Debt Relief Specialist (DRS) who will assess your financial situation and guide you on the best course of action.
2: How does bankruptcy protect individuals in Canada from creditor actions?
Filing for bankruptcy triggers an automatic stay of proceedings, preventing creditors from taking legal action to collect debts. This includes an end to phone calls, letters, and wage garnishments.
3: What assets are evaluated during the bankruptcy process in Canada?
Your house, car, and personal possessions are assessed to determine if they can be sold to repay creditors. Certain items and values are exempt as per provincial government regulations.
4: What is the "surplus income" calculation in the context of bankruptcy in Canada?
It's a calculation based on income, family size, and government guidelines. If you have surplus income during bankruptcy, you're required to make monthly payments to your Licensed Insolvency Trustee (LIT).
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