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Personal Bankruptcy – How Does It Work?

Do you sometimes feel that you are so indebted that declaring personal bankruptcy might be the only solution? You’re not alone. Nearly a third of Canadians think rising interest rates are pushing them towards personal bankruptcy. A December 2017 Ipsos survey revealed:

  • One-third of Canadians cannot pay their monthly bills and keep up with their debt repayments
  • 48 per cent of Canadians say they are within $200 of not being able to meet their monthly financial obligations

Canadians, especially Gen-Xers and millennials, relied on credit cards to finance everything in their lives, from education to cars to housing. They didn’t worry much about repaying their debts as interest rates were so low. Rising interest rates are forcing them to consider the increasing cost of servicing their debts as well as repaying the principal amount.

Some deeply indebted Canadian debtors are asking about declaring personal bankruptcy to escape their debts. But is this a wise choice? Let’s look at personal bankruptcy, how it works, and what the consequences may be for you.

Personal Bankruptcy Defined

Personal bankruptcy law is designed to allow honest debtors to escape their debts and start over while being fair to their creditors. When you declare personal bankruptcy, you surrender everything you own to a Licenced Insolvency Trustee in exchange for the eradication of your debts. You may keep the minimum necessities to allow you to survive.

You must meet these requirements to be able to go into personal bankruptcy in Canada:

  • Have lived or done business in Canada within the last year
  • Be insolvent. You must owe at least $1,000 and be unable to pay your debts when they become due

What Debts Are Discharged By Personal Bankruptcy?

Not all debts are discharged by declaring bankruptcy. Generally, unsecured debts disappear, such as:

  • Credit card balances
  • Lines of credit and personal loans (if unsecured)
  • Income tax and municipal house tax arrears
  • Unpaid utility bills
  • Medical and insurance bills

But you still owe secured debts despite declaring personal bankruptcy. These include:

  • Child and spousal support
  • Fines and court-ordered restitution payments
  • Student loans less than 10 years old
  • Debts that arose because of your fraud or theft
  • Certain government overpayments

What Assets May A Debtor Keep?

Provincial governments determine what assets a person may keep after declaring personal bankruptcy. In Ontario, you may retain:

  • A car worth less than $6,600.00
  • Personal items worth less than $13,150.00
  • RRSPs and house equity up to $20,000.00

You must surrender all other assets, including your investments and RRSPs.

How Long Does Personal Bankruptcy Last?

The minimum length of a bankruptcy is nine months. A bankruptcy court can issue a discharge of bankruptcy to you (this cancels your debts) if you complete your duties in bankruptcy. Generally, the discharge is issued if you are earning only enough money to meet your needs and those of your dependents and have completed credit counselling.

Effect of Personal Bankruptcy On Your Credit Rating

This depends on the credit bureau doing the reporting. Equifax keeps the record of your first bankruptcy on your credit report for six years after the date of your discharge. It keeps a record of your subsequent bankruptcies on your credit record for 14 years. This could adversely affect your ability to obtain future loans from banks and other lenders.

Should You Declare Personal Bankruptcy?

Personal bankruptcy can have major effects on your life and future. It may not be necessary. Other solutions may be available to you. It is imperative that you consult experienced bankruptcy lawyers to assist you when considering the option of personal bankruptcy

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