I’m in Financial Distress. Should I File for Bankruptcy?

May 20, 2020


KEY TAKEAWAYS

✔ The COVID-19 pandemic has hit Canadians who are already struggling even harder than others

✔ Bankruptcy can seem like a good option when you’re in financial distress but there are many reasons not to file

✔ Bankruptcy affects your life in many ways - it costs money to file, it severely damages your credit score and can affect your ability to get credit in future or even an apartment or other job.


We’re in the midst of a global pandemic and, while it’s still too early to tell the final toll, job losses in Canada because of COVID-19 are huge. The Canadian economy lost almost two million jobs in April, a record high. Even before the pandemic hit, many Canadians were already living paycheque to paycheque, and almost half of working renters in Canada didn’t have enough savings to pay bills for more than a month should they lose their jobs.

That’s a lot of Canadians in financial distress and wondering what they should do. During these times, you’re probably seeing or hearing a lot of ads from consumer bankruptcy companies about how consumer proposal or bankruptcy can be a solution in a financial emergency. You might hear possibly misleading terms like ‘a fresh start’.

What’s interesting is that, at the moment, bankruptcies and consumer proposals are not up during this pandemic. There are still options and a lot of creditors are working with their customers and not leaning on them to pay their debts. And that’s a good thing – because bankruptcy is not a good option for a number of reasons.


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What is bankruptcy?

Bankruptcy is a legal process in which a person can be discharged from most (but not all!) of their debts. When you file for bankruptcy, a trustee arranges the selling of your assets and delivering the funds to your creditors. It remains on your credit report for seven years for a first bankruptcy and up to 14 years for a second one.

Brutal truths about  bankruptcy

Bankruptcy Truth #1: It actually costs money.

Yes, that’s correct. Filing bankruptcy doesn’t just mean walking away from your debts. Even if you qualify (and there are many rules on this depending on your income, how many assets you have and what kinds of debts you have as some, like student loans, are excluded), you could lose assets such as your house or car and you have to pay to file for it. The minimum cost in Canada to file a first-time bankruptcy is $1,800 paid over nine months. This is to cover fees to the bankruptcy trustee such as time, administrative and court filing fees. There can be other costs too — depending on how much you make and what your debts and assets are, you might have to pay more toward your debts and you’ll also have to pay more if you get any extra money during the bankruptcy process, such as tax refunds, lottery wins or inheritances. So, with a bankruptcy, which you might be considering because you can’t afford to pay your debts, you have to pay! That doesn’t seem to add up does it?

Bankruptcy Truth #2: It will very negatively affect your credit score (and that costs money too)

You probably know from all our stories on goeasy Academy that your credit score is very important. The higher it is, the better the rates you’ll get on any type of debt – from mortgages to personal loans to credit cards. And lower rates mean more money in your pocket. With bankruptcy, your credit rating goes right to the bottom – it works on a scale from R1 being the best and R9 being the lowest, and your credit score is a range from 900 at the top to 300 at the bottom - and can take years to build up again.

Bankruptcy Truth #3:  It can take years to get access to credit again (which can cost you money too)

Because your credit score can drop as low as in the 300s in a bankruptcy, any lenders would consider you a high risk. So, it’ll be hard to get any access to credit after a bankruptcy except possibly something like a secured credit card. You would have to build up a positive credit history again over time with on-time payments that are reported to the credit bureaus, TransUnion and Equifax. Getting something like a mortgage or a line of credit could take many years.

Bankruptcy Truth #4:  The hit to your credit standing has other long-term effects (which can cost you money too).

When you’re going through a bankruptcy, and even after you’re discharged, the damage to your credit reputation is wide ranging. Renting an apartment can be very difficult because landlords check credit reports to see how likely you are to be able to pay your rent. It can affect your ability to get a job, especially in certain sectors such as finance or for work in the government. Every time you apply for a job, the employer can have you sign a form allowing them to pull your credit reports. That can hinder you from getting the best job you can, and affect your earnings over your entire lifetime! Even something like getting a new cellphone can become difficult as many carriers will run a credit check.

Remember – when so many people are in the same boat, that means there is more effort on everyone’s part, including lenders, to keep people afloat. Get informed about what government supports might be available to you. Always talk to your lenders as many of them have options to help you during these unprecedented times. Other ideas include taking on extra work to make ends meet, or consolidating your debts. Exhaust all the other options before considering the drastic step of bankruptcy.

If you need support, remember that we are all in this together. We are here to help too: contact easyfinancial.com with questions. To learn more about debt, saving and budgeting, go to www.easyfinancial.com/academy.


Sources:

https://www.creditcanada.com/how-to-avoid-bankruptcy

https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br03733.html

https://www.nomoredebts.org/debt-help/bankruptcy-canada/cost-and-fees-of-declaring-bankruptcy

https://www150.statcan.gc.ca/n1/daily-quotidien/200409/dq200409a-eng.htm

https://www.cbc.ca/news/business/bankruptcies-coronavirus-personal-corporate-deferral-1.5551722

https://www.policyalternatives.ca/newsroom/news-releases/covid-19-crisis-nearly-half-working-renting-households-have-month-savings-or

https://www.canada.ca/en/revenue-agency/services/tax/individuals/information-on-bankruptcy.html

https://www.mymoneycoach.ca/blog/cant-file-for-bankruptcy-canada-need-alternatives.html

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