Roughly ½ of 1% of the Canadian population files a consumer proposal or declares bankruptcy each year. In real numbers we’re talking 125,878 in 2016 people and roughly 62,500 of those were consumer proposals. That got me wondering how people learn about consumer proposals and personal bankruptcy, and the laws that govern them. It’s not likely you are going to ask your family or friends if they have ever filed although we know 1 out 6 either have or will file at some point in their life. It’s just not something people are typically willing to talk about, and share advice on.
If you are considering filing bankruptcy or a consumer proposal, here are some issues you may want to think through and discuss with a licensed bankruptcy trustee.
#1 – The Objective Behind Filing For Bankruptcy
Bankruptcy laws are designed to give the honest, but unfortunate debtor, a fresh financial start. This phrase appears quite frequently on government websites and in general advertising for licensed trustees in bankruptcy. You won’t see it in credit counselling or debt consultant ads. Here’s what it means: bankruptcy laws are designed to give Canadians relief from their debts. The premise is that something has gone wrong (unfortunate debtors) and you need a fresh start. You need to be honest in your dealings in order for the laws to work. That means disclosing all of your debts, all of the things that you own, and frankly describing what you think went wrong.
#2 – Surplus Income Rules
The cost to file for bankruptcy is based on the size and total income of your household. The government has set minimum income levels to maintain a reasonable standard of living in Canada (they are called the Surplus Income Rules and can be found in Directive 11r). If you are living at or below the standard for the number of people in your household then your bankruptcy will likely cost around $1,800. This is the government accepted usual cost to file for bankruptcy – you may be able to negotiate a lower fee if you have extremely low income. If your income is more than $200 over the government standard then you will have to make additional payments into your bankruptcy equal to 50% of the amount you are over the standard.
#3 – How Long You Will Be Bankrupt
The length of your bankruptcy is also based on your household size and total income. If you are declaring bankruptcy for the first time and your total household income is at or below the government standard for the number of people living with you, your bankruptcy should run for 9 months. If your total household income is more than $200 over the government standard then it will run for 21 months. The payments discussed in point 2 will run for the full 21 months so this can make a huge difference in the cost of your bankruptcy.
#4 – You Assign Certain Assets to Your Bankruptcy Trustee
In addition to whatever income payments you may be required to make, when you file for bankruptcy you “assign” (which means sign over) the things that you own so that they may be sold and turned into cash to be given to the people you owe. This sounds onerous, but you are allowed to keep personal items, furnishings, tools used to earn an income, RRSPs, even cars – each province has established “provincial exemptions” which are things you are allowed to keep when you file for bankruptcy.
Make sure you understand which, if any, of the things you own are going to be seized and sold if you file for bankruptcy. Too many times I have spoken to people that didn’t realize they would lose their savings, or tax refunds, or other things until they have already filed. (The truth is that most people that file for bankruptcy have already cashed out any savings or investments that they may have had in order to pay down their debt so it is quite uncommon to “lose” something when you file, but it is important that you understand exactly how this part of the law works).
#5 – Potential Legal Penalties and Consequences
If you are not “honest” filing for bankruptcy can get you into a lot of trouble. Here is a list of things that the Court considers less than “honest”:
- Failing to tell your trustee about all of your debts
- Failing to tell your trustee about all of the things that you own
- Misrepresenting your living situation (number of people living in your household, total income coming in to the household)
- Failing to tell your trustee about all of your income
- Selling/transferring ownership of things that you own just before you file
- Maxing out your credit cards, lines of credit and other debts before you file
If the Bankruptcy Court decides you have been less than “honest” they can Order your bankruptcy to be extended, for you to pay more money into your bankruptcy, or the Court may even decide to cancel your bankruptcy altogether if they feel you have abused the process.
#6 – Consumer Proposals: A Legislated Alternative to Bankruptcy
Consumer proposals were created by the federal government to provide people with an alternative to declaring bankruptcy. They are part of overall bankruptcy law in Canada in that they are an option included in the Bankruptcy & Insolvency Act.
The idea behind a proposal is that you can afford to repay a portion of what you owe. The amount you are required to repay in a proposal is the greater of: (a) what you’d have to pay into a bankruptcy; and (b) an amount large enough to induce your creditors to vote in favour of your offer – currently this means you need to offer to repay 30% or more of what you owe. There are no secret formulas, no inside deals, no special considerations – anyone telling you they have any of these things is trying to sell you something and you should consider looking for help elsewhere.
As an aside, in my opinion, consumer proposals make sense in about 60% of the cases of people in financial difficulty. Right now, it is fashionable to talk people into filing consumer proposals, but in about 40% of the cases that I see, bankruptcy makes more financial sense for the people involved. Make sure you understand the difference between a consumer proposal and bankruptcy, in particular the cost, before you decide which procedure makes the most sense for you.
#7 – Personal Bankruptcy Is About Rehabilitation
There is life after debt. At the beginning of this article I told you that 1 in 6 Canadians will file a consumer proposal or bankruptcy at some point in their life. If you complete the procedure properly your debts will be eliminated and you can begin to rebuild your financial life. The Bankruptcy and Insolvency Act mandates that you must attend two credit counselling sessions as part of the procedure. the objective of these sessions is to help you identify why you got into financial trouble in the first place and to provide some money management skills to help you remain financially fit once your bankruptcy is completed.
Something to note. It took time to accumulate your debt – it will take time to rebuild your credit. During the first 2 years after either a consumer proposal or bankruptcy you are unlikely to qualify for new credit (at reasonable rates). The trick is to demonstrate that you want to use credit as a tool, rather than accumulate debt.
While the bankruptcy process is mandated by bankruptcy law, you can see that the choice to file for bankruptcy is not as much about the individual laws themselves, but rather the decision to take control of your finances and determine if using the legal procedure of a bankruptcy or consumer proposal is the mechanism that makes sense for you.
Thank you very much for posting this article, it is very helpful. I just had one question I can’t seem to find the answer to anywhere. If I were to file for insolvency or bankruptcy, would I be able to keep my only credit card that is in good shape (and was never part of my problems)? Or would that need to be closed? Any information would be appreciated. Thank you.
If/when you file for bankruptcy (or a consumer proposal for that matter) you are required to surrender all of your credit cards. It doesn’t matter if they have a balance or not. You hand them in. You are well within your rights to contact the company that issued the card you kept in “good shape” and ask them to re-issue that card, but you must inform that you are an undischarged bankrupt so they may make an informed decision as to whether or not to re-issue the card. Most people that file either bankruptcy or a consumer proposal end up applying for a secured creditor card – look into these before you file.
Hi, I am currently in a consumer proposal and also in a debt management program. I can no longer afford the consumer proposal and the debt management payment plans
I lost my full time job and only working one job. take home pay is $2400 monthly.
I understand as a single person my earnings threshold is $2203 per month. Can you please confirm what my surplus is and if I will have a discharge in 9 months or 21 months. This is my first bankruptcy. Am really struggling financially. I just moved back to live with family because I cannot even afford to rent. Also will my mother and sisters be affected in anyway by me filing bankruptcy?
Please let me know. Thanks for the article.
You have correctly identified that the length of your first bankruptcy will depend on whether or not you have an obligation to pay surplus income. If you do not then you will be eligible to be discharged in 9 months and 1 day. If you are required to pay surplus then you will be eligible to be discharged after 21 months. The surplus calculation is fairly straightforward. The government has said in 2019 a single person household requires $2,203 of income from all sources to have a reasonable standard of living. Everything over that is subject to a surplus income payment of 50%. If on average, after the first 7 months of your bankruptcy your surplus income obligation is $100/month or less then the payments are waived and you are eligible for a discharge after 9 months. In your example, if your income is $2400 per month your surplus obligation will be $98.50 so you may be eligible for the shorter period. keep in mind, if you are paid bi-weekly or weekly at least once every 6 months you will receive an “extra pay” and given how close you are to the $100 limit the extra pay will likely put you over.
This is something to discuss in detail with your trustee before you file for bankruptcy.
if one files for bankruptcy are they allowed to travel outside of Canada for 4 months. This will unpaid leave from work. To take care of sick relative. Will being out of canada for that lengthy period affect the bankruptcy?. I may have to go away for about 4 months to take care of sick relative. But I want to deal with my debt situation first.
My take home pay is $2300 per month. Am single.
Will I have to pay any surplus? This would be my first bankruptcy. I am currently in consumer proposal and also on a debt management program with Xbankers for new debts I got after filing consumer proposal. I lost my full time job and I am unable afford the payments. My part time job is currently allowing me to work full time hours for a few months but not guaranteed . Am just overwhelmed
Your answer is greatly appreciated
Hi Carol. Yes, you are allowed to travel while you are bankrupt. You are also required to complete your duties (such as attend your counselling sessions), so you should consider your duties while making your travel plans. If you are currently in both a debt management plan and a consumer proposal it would be prudent to discuss your situation with a licensed insolvency trustee to determine your best options.
My husband is currently in his 2nd bankruptcy and is very frustrated with his trustee. There was no indication of the surplus income when he first started out. He was separated from his now late wife . There was no support payments being made but the trustee evaluated his income to reflect payments of 1000.00 per month… he explained that this was not possible because he was responsible for paying the marital debts and she was on an independent income from ODSP. The figure of 1000.00 was proposed by her divorce lawyer. She passed away on November 5th of 2018, before the divorce was even filed for. Now we are married and he is working in a seasonal job, and the surplus amount seems to be growing ridiculously high. He doesn’t know from week to week what his hours are going to be. The trustee does not correspond with him, unless my husband reaches out and pushes for any information that he wants to try to get an idea of how much it will be in the end…or what he is able to manage with a fluctuating income and regular monthly bills on top of their “estimated surplus income “ payments. Help…we need some answers and we are getting nowhere with the trustee. Thank you for any information that you could give us.
Have your spouse contact the Office of the Superintendent of Bankruptcy (OSB) and lodge a complaint against the trustee. The OSB will investigate to determine if anything inappropriate has occurred and they should be able to assist with reviewing the surplus income calculation.
If one spouse claims bankruptcy and both names are on the title of a vehicle what happens to the vehicle? Further info that might help you is the vehicle is being purchased on a payment plan from another family member…. 30 months @1,000/month.
A couple of issues come into play. First, did the family member that is selling the car register a lien for the payments? If the outstanding loan value exceeds the value of the car then just keep making the payments (the bankruptcy will have no interest in the car). Second, if the cars value exceeds the remaining balance on the loan then there is equity (residual value) in the car – each owner would be entitled to 50% so what’s value of the person that is thinking about filing for bankruptcy? That may have an impact of how much they have to pay for the bankruptcy. Each province has different exemptions for cars – that will also come into play. Best advice – make sure the car is discussed in detail before anyone signs anything. In that way you’ll know exactly what will happen – surprises in bankruptcy are almost always bad… Better to know before you file.