It's no secret that filing for bankruptcy will hurt your credit rating. But did you know that there's also an upfront cost for entering into bankruptcy proceedings? Or that you will lose any non-exempt assets, such as RRSP contributions or tax refunds as part of your ruling?
The true cost of declaring bankruptcy in Canada can be confusing. In order to set the record straight, we spoke with Stephanie Holmes-Winton, President & CEO of The Money Finder, and asked her to outline the top five misconceptions surrounding personal bankruptcy.
With that in mind, here's what you need to know before you even start considering the bankruptcy path...
1. Associated costs
"Most bankruptcy clients aren't aware that there are three major costs associated with filing," says Holmes-Winston. "These include a minimum contribution, a surplus income payment, and the money the individual will lose through non-exempt assets."
Most trustees in Canada require that their bankruptcy clients make a minimum contribution each month towards the administrative charges associated with the bankruptcy filing. This can range from $200 to $250 per month. In most cases, your trustee will not file your paperwork until at least one full month's worth of contributions has been paid. It's worth noting that the federal government regulates trustees' fees and that the first consultation is always free. Bankruptcy trustees are required to abide by a stringent code of ethics, which requires them to provide their clients with fair and honest financial advice.
During the filing period, the government will specify the amount of income that you're permitted to earn each month and retain for your living expenses. If you earn over this amount, you will be required to pay this surplus income back to the government. Your allowable income is determined based on a complex formula that takes into account your earnings level, as well as the size of your family and number of dependents.
Finally, if you file for bankruptcy, you will automatically lose any non-exempt assets that you have (more on exempt items below). This includes any money that you've contributed to your RRSP in the last twelve months, your tax refund, HST credits, and any equity that you may have in your home or car. You will also be forced to surrender any "windfalls" that you receive or become entitled to while bankrupt. This will include any income acquired by luck, such as an inheritance or lottery winnings.
"If you're concerned about the cost of bankruptcy, a consumer proposal may be a better financing option for you," advises Holmes-Winton. "This type of arrangement may come with a lower monthly payment as compared to bankruptcy. Furthermore, beware companies that recommend you stop making payments while you negotiate your proposal. To be on the safe side, engage a trustee in bankruptcy to aid in these efforts."
2. The impact on your credit rating
"Most Canadians don't understand that a bankruptcy filing will negatively impact their credit rating for a minimum of six years," explains Holmes-Winton. Repeat filers could be looking at nearly twice as long, or roughly 14 years of bad credit.
"While the consequences are far-reaching, it's important to note that filing for bankruptcy won't end your ability to secure credit forever." In some cases, the repair process can take as little as twelve to eighteen months. "Every case is different; as such, it's important that you meet with your trustee to review your options."
3. The impact on your home
"Filing for bankruptcy does not mean you will automatically lose your home," insists Holmes-Winton. "What you can and cannot keep depends a lot on where you live and what the asset is." In Alberta, for example, filers with less than $40,000 equity in their home are given the opportunity to keep their property. While there's no such rule in Ontario, filers are given the option of "buying back" their home from the bankruptcy estate by depositing the equity value.
4. The period of waiting to repair your credit
A common myth associated with bankruptcy is that you cannot apply for new credit until your bankruptcy notation comes off your credit history. This is simply not true. In fact, bankruptcy filers can start the credit repair process immediately. There is nothing stopping you from applying for a secured credit card as long as you have a stable income.
Which leads us to the final point...
5. Credit counselling requirements
Credit counselling is a mandatory bankruptcy requirement. And it's there for good reason. Multiple bankruptcy filings are not uncommon in Canada - in fact, they're becoming more and more frequent. "Once discharged from bankruptcy, some citizens are quick to revert back to their old ways," says Holmes-Winton. While it's impossible to educate a person on the intricacies of proper financial planning in two short sessions, these mandated counselling opportunities provide individuals with the opportunity to rethink their spending and begin building better habits.
Explore all other options first
When it comes to filing for bankruptcy, Holmes-Winton recommends pursuing alternative methods of managing your debt. To put it in simple terms: "Bankruptcy should be your last option, not your first."