What is Bankruptcy and Should I Declare It?


KEY TAKEAWAYS:

✔Bankruptcy is a legal process wherein an individual can be discharged from many, though not all, of their debts

✔A declaration of bankruptcy remains on your credit Bureau for 7 years after discharge date.

✔Debt consolidation may be a reasonable alternative to filing for bankruptcy


One of the hard truths many Canadians will have to face in 2020 is that despite their best efforts, their debts have exceeded what they can reasonably manage to service. In fact, more than a million Canadians are currently on the edge of bankruptcy and over 4 million more will join them if their financial stability doesn’t improve within the next three months. In many cases, this is due to financial strain related to the COVID-19 pandemic, which created sudden income loss for millions of families across the country. Economists are predicting that declarations of bankruptcy will occur in significantly higher than average numbers this fall.

Debt elimination strategies can be incredibly effective, but insolvency can’t always be avoided. There are many myths about bankruptcy, and it’s often positioned as a silver bullet for consumers facing financial hardship. Before you decide to file for bankruptcy or a consumer proposal, it’s important to consider all of your options, look into the risks of and understand how a declaration of bankruptcy will impact your financial health in the long term.

What is bankruptcy?

Bankruptcy is a legal proceeding that is typically initiated when a person or business cannot pay their debts. The person filing for bankruptcy is known as the debtor, and the process begins when they file paperwork as per the Bankruptcy and Insolvency Act. The purpose of bankruptcy is to permit the debtor to obtain discharge from most of their debts (in many cases, all unsecured debts can be eliminated). Bankruptcy must be filed through a Licensed Insolvency Trustee who will ensure that both the debtor and all creditors are treated fairly. As this is a legal process, it comes with a fee that must be paid by the debtor (this number begins at around $1800 and increases based on the administrative work involved).

While filing for bankruptcy can clear most (if not all) of your debts and create a fresh start, it comes at a price. Your credit score will be significantly impacted, as will your ability to gain access to credit. Both of these effects can be long term and will stay on your credit rating for at least seven years (14 years if you’ve filed for bankruptcy previously).

What is a consumer proposal?

One common alternative to filing for bankruptcy is initiating a consumer proposal. A consumer proposal is a legally binding agreement to repay a portion of your debt to each creditor over a specific period of time in return for complete and full debt forgiveness. All payments are interest-free and can be spread out over up to five years. A consumer proposal is essentially a unique repayment negotiation based on what you can afford to pay. This method is sanctioned by the Canadian government as an alternative to declaring bankruptcy and may be worth it if you can afford to pay back some of your debt.

To qualify for a consumer proposal, you must meet specific requirements such as being a resident of Canada, owing $250,000 or less (excluding your mortgage), having debts greater than your assets (confirmed insolvency) and demonstrating an ability to successfully repay a portion of what is owed. Like filing for bankruptcy, initiating a consumer proposal will have a very negative impact on your credit score and ability to access loans in the future.

Now that we’ve covered the basics on both bankruptcy and consumer proposals, here’s a closer look at some of the myths and truths surrounding each option.

I have a lot of debt, and it feels like I’m in over my head. Are there other options?

If you can’t pay your bills or service your debt, there are options that allow you to avoid declaring bankruptcy. A consolidation loan may be a reasonable alternative to bankruptcy or a consumer proposal. This is essentially a new loan to cover payments on one or more outstanding loans, often with better terms and/or at a lower interest rate. It combines all of your separate debts into one easy payment, enabling you to protect your credit score while rebuilding your financial situation over time. Debt consolidation can help save you money on interest payments and other fees, avoid seriously damaging your credit score and simplify your monthly budget. For many Canadians, it creates a much-needed bridge to get them through hard times.

While there is no one-size-fits-all solution, it’s best to look at options like this one before making the leap to consumer proposals or bankruptcy. If you’re considering a consolidation loan, here’s a debt consolidation calculator that may be useful.

Ready to get back on track with your finances? We can help.

We all go through hard times, and the last few months have been particularly challenging for many Canadians. If your debts are larger than you’re comfortable with, don’t wait - please reach out to your local easyfinancial branch or easyhome branch to discuss your needs, or give us a call at 1-888-502-3279. We’d be pleased to offer guidance on how to address your debt and move forward with your life.

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