Three “Costs” of Bankruptcy
Base Contribution: Most trustees in Canada will require you to pay a base contribution each month that you are bankrupt. The average base contribution across Canada is approximately $200 per month, but it could be more or less, depending on your situation. For example, if you have a complicated situation, perhaps because you are self-employed, the base contribution may be higher.
All trustees in Canada are independent businesses; they don’t receive any funding from the government or your creditors, so the base contribution is necessary to cover their basic administrative costs.
Surplus Income: If your income is over the surplus income threshold set by the government, you are required to make a surplus income payment. Each month you are required to submit proof of your income (copies of your paystubs) to your trustee, and then your trustee will calculate your surplus income. If your income during the first seven months of your bankruptcy is more than $200 over the limit, per month, on average, your bankruptcy will be extended for an extra year. For a first time filer, if you have surplus income your bankruptcy is extended from nine months to 21 months, and you are required to make those surplus income payments for the entire 21 months.
(If you expect to have significant surplus income, it may be wise to instead consider a consumer proposal as an alternative).
Assets You Lose: The third significant cost in a bankruptcy is that you may lose some of your assets. For example:
- You lose your tax refund for the year of filing, and all tax refunds for all prior years that you have not yet received. If you file in January, 2012, you lose your 2012 tax refund, because that’s the year of bankruptcy, but you also lose your 2011 tax refund, because you haven’t received it yet.
- You lose any contributions you have made to your RRSP in the twelve months prior to bankruptcy.
- You lose all other investments, such as RESPs, stocks, and Canada Savings Bonds.
- You lose the equity in your house; the rules are different in each province, so contact a trustee for more details.
- You may lose your motor vehicle, such as a car or truck. Again, the rules are different in each province; in most cases you can keep an older vehicle.
Determining The Full Cost Of Bankruptcy
So is bankruptcy the correct option for you? Start by adding up the cost of bankruptcy.
If you will be paying $5,000 because of your surplus income, and if you will lose a further $5,000 in assets, that’s a total cost of $10,000. If your total debts are $6,000, filing bankruptcy doesn’t make any sense.
A consumer proposal is also an option. If you will be required to pay (or surrender assets) totaling $10,000 in a 21 month period, offering a proposal of $200 per month for 60 months might be a better option. The cost is slightly higher, but at $200 per month it’s more affordable each month.
