No-one wants to file bankruptcy. But for some, it’s the best way out of a bad situation. If you can’t afford to pay your debts, here is what you should know about how bankruptcy can help, and where it can’t.
What Debts Are Included in Bankruptcy?
Bankruptcy in Canada deals with unsecured debts. That includes:
- Credit card debts;
- Unsecured bank loans and lines of credit;
- Payday loans
- Tax debts
- Overdue bill payments, even if they have gone to collections
There are however some debts that are not included, or which have special rules:
Secured debts, like your mortgage or car loan are not included in a bankruptcy. That can actually be a good thing. If you don’t have any equity in your home, you can continue to make your payments and keep your home. Same goes for you secured car loan. As long as your loan or lease payments are current, you can keep the secured asset. Even if there is equity in your home, there are ways to keep your home.
Student loans, are eliminated when you file bankruptcy as long as you have been out of school for at least 7 years at the time you file.
Some debts are specifically excluded by bankruptcy law. This means these debts cannot be eliminated by declaring bankruptcy. Child support and alimony arrears, court fines or penalties, and government overpayments for things like child tax credit or EI are common debts not discharged by bankruptcy.
What Does the Stay of Proceedings Mean?
One of the most common reasons people declare bankruptcy is to stop creditor actions like wage garnishments and collection calls. As a legal process, Canadian bankruptcy provides an immediate stay of proceeding against the actions of most creditors. Wage garnishments are stopped, and collection calls will stop.
There are a few actions that can’t be stopped by filing bankruptcy. Garnishments pursuant to a Family Court order continue. Actions by secured creditors to repossess or foreclose on secured assets when you are in default on the loan are not stayed by bankruptcy.
Most other creditor actions however do stop. Your trustee notifies all of your creditors after you file. Once their records are updated, collection calls should stop. If they don’t your trustee can help you deal with those creditors specifically.
Will Bankruptcy Fix Your Financial Problems?
What bankruptcy does do is help you repair your current cash flow problems. When you file bankruptcy you no longer have to make payments against your outstanding debts. You do have to make bankruptcy payments as part of the cost of bankruptcy however in most cases these are less than the minimum payments you are struggling under today. In addition, these payments are for a defined period of time – often as short as 9 months. Once you are discharged, your debts are eliminated and you can now begin to rebuild your savings without the burden of all that debt.
What bankruptcy can’t do is improve your spending habits. There are however two credit counselling sessions included with each bankruptcy in Canada. In order to benefit from the fresh start bankruptcy provides, it’s important that you apply the skills taught about budgeting and money management to help make sure you don’t find yourself in the same situation 5 years down the road.
What Does Bankruptcy Do To Your Credit?
This is always a sticky point for many people I meet with. They are worried about the fact that bankruptcy will appear on their credit report and remain there for six years after their discharge.
What bankruptcy does is:
- Eliminate your debt
- Improve your cash flow
- Provide important money management skills
- Allow you to start over (your fresh start)
It is these benefits that will allow you to rebuild your credit once your bankruptcy is complete and put you in a better financial position than you are today or will be if you continue to barely keep up with your minimum payments.
Bankruptcy is not a quick fix, it does come with a cost – but for many the benefits are overwhelming.