Inflation and rising interest rates are wreaking havoc on household budgets. No wonder the number of bankruptcies is increasing. What to do if you have to assume the worst?
More and more consumers are falling into a debt spiral from which they can no longer escape. “The people who come to us have an average of $20,000 in debt on their credit cards, the rate is around 20%. It quickly becomes uninhabitable,” reveals Pierre Fortin, president of Jean Fortin et Associés, a licensed insolvency administrator.
In these circumstances, bankruptcy could be the only way out.
How it works?
Before considering this, a consumer must meet with a bankruptcy trustee. This lists the debts and creates a budget to determine financial strength and the debt ratio. His job is then to recommend the best exit route.
Where possible, the trustee will give preference to the consumer proposal, of which 92% of applications are accepted. Otherwise, bankruptcy will be considered.
The trustee then sends a report to the creditors. The person is therefore subject to the protection of the law: the legal proceedings are frozen and interest is no longer charged on debts. If the creditors accept the trustee’s proposal, it is insolvency.
The law provides for two mandatory consultations with the trustee. At the first appointment, which takes place about a month after bankruptcy, the trustee advises on drawing up a budget and using credit. Seven months later, the second meeting addresses the causes of debt and the reality of a person needing to regain financial health.
The process takes between 9 and 21 months, depending on the income of the insolvency administrator. At the end of this period, automatic debt relief occurs. In the case of a second bankruptcy, it is 24 to 36 months.
The costs
Bankruptcy is not free.
If your net income (after taxes and certain obligations such as alimony, child care expenses, and medical expenses) is less than $2,500 per month, you will typically only pay the trustee between $170 and $240 per month for nine months. These situations account for around three quarters of all personal bankruptcies.
If your net monthly income exceeds $2,500, you pay 50% of the excess to pay off debts and escrow fees. For example, if your net monthly income is $3,500, you would pay $10,500, which is $500 per month for 21 months. With a net income of $5,000, we’re talking $26,250, or $1,250 per month for 21 months.
However, these calculations differ for households with children because the elusive federal family allowances are taken into account.
The results
From a psychological perspective, bankruptcy is a burden. But for the majority, the resulting liberation is more restorative than the shame of failure.
Bankruptcy will damage your credit report for six years. “But by the time someone consults a trustee, the credit file is already heavily affected,” recalls Pierre Fortin. Many consumers sometimes have an R9 rating (the worst) for longer than those who go bankrupt.”
We may also lose some of our property and assets to repay creditors. Some are protected by law (see table). But the vast majority of insolvency administrators keep furniture, clothing and, under certain conditions, their house and car (see box).
Certain obligations remain despite bankruptcy, such as: E.g., alimony, debts to ex-spouses, student debts that are less than 7 years old or related to fraud, a fine, a civil liability penalty for physical or sexual harassment. Ultimately, there is a persistent misconception: tax debts do not survive personal bankruptcy.
When will you lose your house and car?
Bankruptcy does not automatically mean losing your home. Each case is unique, but the higher the mortgage on the home, the less attractive it is to creditors. If the owner cannot pay off his mortgage after bankruptcy, he still has to hand over the keys.
You keep your purchased car if it is essential for work, medical care, or public transportation is not available. If the value is less than $5,000, creditors generally do not request a seizure. If the insolvency administrator for a rental car can no longer fulfill his rental agreement after bankruptcy, he will lose his vehicle.
MEMORY
Debt that goes bankrupt
• Outstanding credit card balances
• Lines of credit
• Personal loans
• Tax liabilities
• Debts from debt collection agencies
• Student debt that is less than seven years old
What is elusive
• RRSP and RRIF (excluding contributions made in the last 12 months prior to bankruptcy)
• Furniture and personal items valued at $7,000 (you will lose your grand piano, but not your two children’s furniture, even if it is worth more than $7,000)
• Cash surrender value of a life insurance policy if the beneficiaries are the children or the married spouse (but not the civil partner).
• The tools you need to do your job
• Food, clothing
What is tangible
• The house, condominium (except in certain circumstances)
• TFSA, CELIAPP, RESP (Registered Education Savings Plan)
• Furniture and items that are the subject of a financing agreement
• Luxury or recreational vehicles (snowmobile, motorcycle, boat, ATV)