What happens during bankruptcy? We’re going through each of the 8 steps to filing for bankruptcy to help you determine if this debt relief solution is right for you.
Bankruptcy has a bit of a negative reputation. Yet, it is a program that has helped millions. It allows people to take back control of their finances. Bankruptcy made it possible for them to live debt-free and move on to other financial goals like saving for emergencies and retirement. Here are the steps they took to get to that life.
Step 1: Free consultation
To figure out if bankruptcy is suitable for you, speak with a licensed insolvency trustee (LIT). The first meeting with a LIT is often free. They will look at your finances, level of debt, and household income to see if bankruptcy is an option.
These criteria must be met to be eligible for bankruptcy:
- You must owe $1000 or more in unsecured debt
- The debt you owe exceeds the value of your assets
- You’re unable to pay your debts when they are due
Step 2: Approval of bankruptcy documents
Once your trustee confirms you’re eligible for bankruptcy, you’ll have to sign some documents to go ahead with filing the insolvency. Specifically, you’ll need to sign two documents:
- An Assignment: This is a document that will let your trustee take control of your property for the benefit of your creditors.
- A Statement of Affairs: This document will list your assets, responsibilities, income, and expenses.
The LIT files the completed and signed documents with the Office of the Superintendent of Bankruptcy (OSB).
Step 3: Creditors are notified
Once you have filed for bankruptcy, your creditors will be notified. From this point forward creditors cannot:
- Contact you for payment. This will also stop collection agencies from contacting you.
- Garnish your wages. Even though they can’t do this, if your income surpasses the permitted limit, you may have to give up a portion of your income to your creditors.
- Sue you or take any other legal action against you.
Step 4: Meeting of creditors
While meetings with creditors rarely happen during a bankruptcy, they do sometimes occur. Most often, the aim of these meetings is to confirm the trustee’s assignment and to go over your assets and liabilities. This is also when you’ll answer questions about your financial status and other matters. All this information helps your creditors verify that bankruptcy is necessary for you to regain sound financial footing.
Step 5: Make regular payments to your LIT
Once bankruptcy is approved, you’ll start making monthly payments to your LIT. The trustee will distribute your payments amongst your creditors, and they will also deduct a percentage of it for their administration fee. Filing for bankruptcy usually costs at least $1,800 for the first time. To make it manageable for you, this is divided into monthly payments of $200 per month for nine months. It’s important to note that this is the baseline cost for a Bankruptcy. There are other things that factor into this part of the process and cost. These include:
Tax Return Documentation
Fulfilling the requirements of bankruptcy includes supplying your trustee with all the documents required to complete your tax return, including your T-4 slips.
Monthly Income and Expenses
During the bankruptcy process, you may be required to pay surplus income costs. Surplus income is the amount of income you take home each month above the income level Canadian law allows. A portion of any surplus income goes to your trustee to pay your creditors. To accomplish this, each month in bankruptcy, you must supply your trustee with pay stubs and a document outlining your expenses.
Value of assets
The final cost of bankruptcy depends on the value of your assets. If your assets are not exempt, they will be sold during the bankruptcy process. The trustee manages the sale of these assets. The money from the sale is used to pay your creditors. Trustees are also eligible for a portion of the funds derived from the sale of assets. Here’s the breakdown of their portion:
- 100% of the first $975
- 35% up to the next $2,000
- 50% of receipts over $2,000
Step 6: Assets management
Unlike most other debt-relief options, filing for bankruptcy means that you will have to surrender certain assets to your bankruptcy trustee. These assets help to pay your creditors part of what you owe them. Otherwise, you surrender them to avoid taking on new debt during bankruptcy. It’s worth noting that trying to hide non-exempt assets can lead to criminal charges, so you must be honest with your trustee about the items you own.
Personal Property
During bankruptcy, some items of worth, such as vehicles, household furnishings, jewelry, and may need to be surrendered. You may even have to surrender your house if it is worth a lot more than what you owe on the mortgage. Which items depends on the province/territory you reside. Each one has varying rules on which items must be surrendered and which are exempt. You will not be left destitute, but you will likely have fewer assets when the bankruptcy is finally discharged.
Credit Cards
One of the leading causes of bankruptcy is credit card debt. Thus, surrendering all your credit cards except for employer-issued cards is a standard part of this process. This will prevent you from taking on more debt as you seek debt forgiveness in bankruptcy.
Step 7: Bankruptcy counselling
During the bankruptcy process, the law states that you must attend two mandatory counselling sessions. This counselling will benefit you because it will teach you the skills that can help keep you from getting into financial trouble again.
First session
In your first financial counselling session, you’ll get tips on how to improve your financial health. You’ll learn how to make a budget and track your spending. You’ll also go over how to spot early signs of financial misfortune.
Second session
During your second financial counselling session, your counsellor will discuss your financial goals, your use of credit, and how to improve your spending habits. To help you understand more about what to expect from these counselling sessions, the OSB has an online learning material called Insolvency Counselling Program Introduction.
Step 8: The trustee discharge
According to the OSB, bankruptcies are typically discharged after nine months if you have fulfilled most of the bankruptcy conditions. However, if you are required to make extra payments it can take longer. Automatic discharge can happen anywhere between nine and twenty-one months. You will need to fulfill all the obligations below to be discharged from bankruptcy.
- Complete all essential payments, including baseline and surplus.
- Transfer all designated assets to the trustee.
- Take part in mandatory credit counselling sessions
- Attend any court hearings, examinations, or meetings with creditors.
There are four main types of discharges you need to know about:
- Absolute discharge: This means complete release from eligible debts according to bankruptcy law.
- Conditional discharge: This discharge requires meeting specific conditions before discharge. For example, you may be required to surrender all credit cards to your LIT.
- Suspended discharge: This is an absolute discharge that will come into effect in the future.
- Discharge rejection: The court retains the authority to deny a discharge.
Final thoughts
While these steps may seem daunting, it is important to remember that bankruptcy can help you reclaim your financial future. It also helps you live a debt-free life and can raise your overall financial health.
Although bankruptcy is a good debt relief solution, it’s best to consider it a last resort. There are many debt-relief solutions available such as consumer proposals and debt management programs. These alternatives tend to have less severe consequences but are still highly effective at helping people get out of debt. Consider contacting one of our credit counsellors to find out about our debt relief programs.