Ten myths about bankruptcy

14 May 2018 by National Bank
bankruptcy in Canada

If you are having financial difficulties, personal bankruptcy is a solution to consider for a new start while not requiring you to settle your debt in its entirety. However, it is crucial to be well informed before choosing this option. Still today, several myths persist about bankruptcy. Here's 10 of them.

1. Everyone will know you declared bankruptcy.

All bankruptcies are public but generally, you need to do extensive research to obtain that information. Only major bankruptcies are subject to a legal notice published in newspapers. In most cases, it is solely the creditors and trustees (if applicable) of a consumer that are informed.

2. Your property will be seized.

Actually, declaring bankruptcy allows you to keep some property. Quebec legislation states that you can keep furniture and appliances up to $6,000 in value. Other exceptions include food, clothing and necessary tools for work. In some cases, you’re allowed to keep your car as long as you make the payments.

In Ontario, you’re allowed to keep up to $13,150 of furnishing and appliances. Similar exceptions apply, however with different amounts. You can keep one motor vehicle not exceeding $6,600 and an equity in your home if the amount is less than the $10,000.You may lose your house, but that is not automatic. The Licensed Insolvency Trustee checks the equity of the property, meaning the mortgage portion already paid for. If low, it may be possible to keep your house. If significant, you may have to sell or refinance it. In the event that your financial institution has to foreclose on your property, you will be granted time to relocate. The Licensed Insolvency Trustee will discuss the timeframe to set a deadline with you.

3. Your bankruptcy will affect your spouse's credit rating.

Bankruptcy is personal and therefore will not affect your spouse credit rating, nor will their property be seized. However, if you own common property, your spouse may be required to redeem your shares to be able to keep them.

4. Bankruptcy writes off all your debt.

The truth is that it will write off most of your debt. However, there are exceptions such as child support, student loans if you completed your education at least seven years ago, court-ordered fines, financial penalties or debt contracted through fraud.

Also, contrary to widespread belief, bankruptcy can write off income tax debt. However, you may have to appear in court for a hearing and ask a judge to be liberated from your income tax financial obligations. A hearing is required if your tax debt totals more than $200 000 or if the total amounts to 75% of your debt. It is strongly advised to use the services of a lawyer if you have to appear in court for a hearing. Your creditor is most likely to do the same to not free you from your debt.

5. Declaring bankruptcy will ruin your retirement.

Quite the contrary! Your pension fund, your Locked-in Retirement Accounts (LIRAs) and your Registered Retirement Income Funds (RRIFs) are unseizable. In the case of a Registered Retirement Savings Plan (RRSP), only the contributions made in the last twelve months can be seized. It is possible to declare bankruptcy without losing all your retirement savings.

6. You can no longer get a loan after declaring bankruptcy.

Your credit record is will be marred for a six-year period following the bankruptcy discharge. In the meantime, it will be more complicated for you to obtain credit. However, if creditors are already chasing you, your credit is probably already badly affected. With time and by adopting good habits such as making your payment on time, you will be able to rebuild your credit.

7. You should get help from a debt management advisor before declaring bankruptcy.

In fact, you may be spending your money for nothing. Only the Licensed Insolvency Trustee is authorized to file an assignment in bankruptcy. It’s safer to deal with them directly. Even if you are not sure that bankruptcy is the solution you need, you do not lose anything at meeting with them. The first consultation is always free. Then, the trustee fees depend on the arrangements between you and the creditors and the amount of money to be paid to them. Insolvency trustees are regulated by a code of ethics and act in compliance with the Bankruptcy and Insolvency Act.

8. You could lose your job due to bankruptcy.

Usually, your financial situation should not put your job at risk. However, for certain professions such as lawyers or notaries, bankruptcy may cause a problem. Find out about the potential consequences of personal bankruptcy on your career before going ahead.

9. Bankruptcy is the only solution to your financial difficulties.

In some cases, a debt consolidation or a consumer proposal can be the best option. Still not widely known about, the consumer proposal is an offer you make to all your creditors to reimburse part of your debut (for example 70%) with no interest within a maximum five-year timeframe. With these alternative options, a Licensed Insolvency Trustee can help you choose the best solution after analyzing your financial situation.

10. If you declare bankruptcy, you no longer need to make payments.

Depending on your financial situation, you could have to make payments to the Licensed Insolvency Trustee. For example, if your income exceeds the basic living amount, you could have to give some part of it. This basic amount, depending on your household, is fixed annually by the Office of the Superintendent of Bankruptcy which controls and supervises all insolvency files, insuring the legislation and rules are respected.

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