Who Actually Pays for Bankruptcies: Taxpayers or the Government?

_{By Bromwich+Smith Staff | 1164 words | Reading Time: 5 minutes and 45seconds | Date: 2021/12/17}

What is bankruptcy?

In some cases declaring bankruptcy can be the best option to eliminate debt and allow you to start over with a clean slate. 

Bankruptcy is a legal process performed by Industry Canada under the Bankruptcy and Insolvency Act. When you file for bankruptcy, the trustee becomes the administrator of your property and assets. The role of the trustee includes winding up the property by selling all the assets and depositing the funds in a trust for the creditors in bankruptcy.

Innovation, Science and Economic Development Canada is responsible for the enforcement of the Bankruptcy and Insolvency Act. The Superintendent of Bankruptcy, the Bankruptcy Tribunal, the Official Receiver in Bankruptcy, and the trustee are all under its authority.

Now that we have defined it, let’s clarify who is responsible for paying for bankruptcies. 

Does The Government Pay for Bankruptcies?

Even though you may have more debt than you can handle, unfortunately, bankruptcy doesn’t come free. And while you’re seeking financial freedom through filing for bankruptcy, you may be wondering who exactly pays for bankruptcy? Does the government pay for it? Do taxpayers pay for it? Do you personally pay for it? And, importantly, how much is it?

Before we can answer who exactly pays for bankruptcy, we need to clarify the types of costs involved.

What Sort of Fees and Payments are Involved in Bankruptcy?

Initially, there is no upfront cost in filing for bankruptcy. Your initial consultation with a Licensed Insolvency Trustee is free. The Trustee will evaluate your finances and make a recommendation on filing a consumer proposal or bankruptcy free of charge.

If you decide to proceed and file based on the Trustee’s recommendation, then you will begin to incur costs.

When filing for bankruptcy, there are filing fees and other miscellaneous costs involved. Your out-of-pocket costs can vary greatly, depending on whether you hire a lawyer and whether you’re eligible to have the court filing fee waived. 

Out of pocket expenses for Bankruptcies can include;

• A filing fee: There is a range which will be determined at the time of filing. 
• Credit counseling fee: When filing for bankruptcy, you must first receive credit counseling. Most credit counseling services are fairly low-cost. If you aren’t able to afford credit counseling, you should speak to the agency about your situation to see if the fee can be waived for you.
• Debtor education course: After you file for bankruptcy, you will be required to attend a debtor education course. Most debtor education courses can also be low-cost. Again, if you’re unable to afford this, you may be able to get the cost lowered or waived completely. 

Overall Financial Costs of Bankruptcy

Base contribution cost

The first bankruptcy cost covers administrative fees and expenses, as well as paying the Licensed Insolvency Trustee for their time. This is known as the base contribution cost. For a first-time filing, the minimum cost is $1,800, broken into 9 monthly installments of $200.

However, in some cases, the base contribution cost may be higher – $1,800 is the minimum you can expect to pay.

Surplus income cost

The second cost of bankruptcy only applies if you exceed the threshold for surplus income by more than $200. The Canadian government essentially says that you only need a certain amount of income to live while you file for bankruptcy.

The Office of the Superintendent of Bankruptcy sets the surplus income limit each year. Family size is also a factor – a larger family has a higher surplus income threshold. Basically, you can keep more of your income if you have a larger family.

Your Licensed Insolvency Trustee will tell you how much you’ll be expected to pay. You must regularly submit tax documents and pay stubs to the bankruptcy trustee to verify your income during your filing.

Asset cost

The final cost of bankruptcy is based on the value of any assets that you have. Assets that don’t qualify for an exemption will be liquidated during your bankruptcy. That means that the trustee oversees the sale of these assets, then uses the funds from the sale to pay your creditors.

If you have assets that you don’t want to see sold – particularly high-value assets – then you should exhaust all your other options for relief before you decide to file bankruptcy.

The personal costs of bankruptcy

Monetary costs aren’t the only costs associated with filing for bankruptcy. The following are personal costs you will face as well. 

Time cost

Filing for bankruptcy takes time and there will be certain tasks you’re required to complete during your filing. You must complete paperwork and submit documentation regularly to your trustee. 

Credit cost

Bankruptcy is noted on your Equifax credit report for six years from the date your debts are discharged; it’s noted for six to seven years on your TransUnion report, depending on the province or territory where you live.

You won’t be able to take on new lines of credit while you are going bankrupt. After your discharge, it will be a struggle to rebuild your credit. You either won’t get approved or you will face higher interest rates. This means higher costs for borrowing, as well.

Professional cost

You cannot serve as a company director while you are in bankruptcy.

So Who Actually Pays for Bankruptcies?

Now that you know the costs involved from out-of-pocket, to financial and personal, who pays for bankruptcies?

The person who files for bankruptcy is typically the one that pays the court filing fee, which partially funds the court system and related aspects of bankruptcy cases. In some cases depending on your income, your Licensed Insolvency Trustee can ask to have the fee waived. In that case, the Bankruptcy Court picks up the tab by absorbing all related expenses to ensure the person receives all required services to successfully complete their bankruptcy case. Since that places a significant burden on the courts, fee waivers are only granted when it is clear that the person simply can’t afford to pay the filing fee even after the case is filed and debt no longer has to be paid. If your court filing fee is waived you can often obtain a waiver for the credit counseling and debtor education courses as well. For those of you who wish to hire a lawyer to help you with your case, you will be responsible for paying the lawyer. Keep in mind, however, that you can file bankruptcy without a lawyer if you can’t afford to hire one.

We want to remind you that there are options

Since 2002, we have helped thousands of Canadians with restructuring programs that eliminate debt and put them back on track to rebuilding their worth. Our goal is to examine your financial situation and provide the best solution for your specific financial challenges. Whether that be budgeting, counselling, a consumer proposal or bankruptcy, to provide a plan that makes you whole again and settles your debt once and for all.

Remember, we’re here to help you find the solution that best fits your needs. Don’t hesitate, call us today to receive an initial free, no obligation, confidential consultation by phone 1-855-884-9243. You can also request a call. We want to see you flourish!