What Is Personal Bankruptcy and How Does It Work?

Personal bankruptcy is a topic of conversation fraught with emotion and prejudice. As a last resort, we often forget that it allows individuals facing financial dead ends to get a fresh start.

In this article, we’ll guide you through the personal bankruptcy process. Whether you’re looking for information for yourself or to support a loved one, this article is for you. You’ll find useful insights to help you make informed decisions during this difficult time. So, let’s dive into this complex topic and demystify personal bankruptcy to better understand the process.

An Expression No One Wants to Hear

Personal bankruptcy is a financial situation in which a person can no longer meet their debts and financial obligations to their creditors. This occurs when a person’s total debts exceed their ability to repay them with their available assets and income. In this situation, seeking professional help is essential.

Bankruptcy is a process governed by the Bankruptcy and Insolvency Act (BIA). It allows an indebted person to discharge most of their debts by making monthly payments and surrendering certain assets if necessary. A Licensed Insolvency Trustee (LIT) will guide you through this process.

My role is to support you when you’re facing very difficult financial situations. I do everything I can to prevent it from coming to that. But when there’s no other option, we have to turn to bankruptcy. 

– Mathieu Roy, Licensed Insolvency Trustee

What Is Included in a Bankruptcy?

Whether you have credit card debt, unpaid taxes, or outstanding loan balances, it doesn’t matter. As long as the debt is in your name, it’s included in your bankruptcy. 

– Mathieu Roy, Licensed Insolvency Trustee

Unsecured debts, such as credit cards, personal loans, and lines of credit, are generally included in a personal bankruptcy.

Student Loans

Under certain circumstances, student loans may be included in a personal bankruptcy. To do so, the person must have stopped being a student at least seven years ago. Additionally, if a person can demonstrate that they are experiencing exceptionally difficult financial circumstances, it is possible to include student debts that have been outstanding for only five years.

Tax Debts

Tax debts may be included in a personal bankruptcy under certain conditions. Tax debts include unpaid taxes, GST/HST, and other government debts.

Medical Debts

Medical debts, including unpaid medical bills and hospital bills, can be included in a personal bankruptcy.

Credit Card Debts

Debts related to credit cards can be included in a personal bankruptcy. However, they must not be related to fraud or fraudulent conduct.

What Is Not Included in a Bankruptcy?

Alimony debts cannot be discharged through personal bankruptcy. These debts include child support obligations and spousal support obligations. The same applies to criminal fines and penalties.

Furthermore, debts secured by an asset cannot be included in a personal bankruptcy unless you surrender the asset. Mortgages and auto loans are common examples of secured debts.

What Are the Impacts of Bankruptcy?

Assets and Property

Bankruptcy is a legal process through which you transfer your assets to a Licensed Insolvency Trustee who will be responsible for eliminating your debts. To repay your creditors, certain assets not exempt under the Bankruptcy and Insolvency Act may be sold. 

Many assets are exempt from bankruptcy, including your essential belongings and a basic amount for your vehicle. Similarly, the tools of your trade necessary for your profession or trade are generally exempt. You will, therefore, be able to continue your professional activities and maintain an income.

In addition, your RRIFs and RRSPs are protected if a bankruptcy occurs, with the exception of amounts contributed during the 12 months preceding the filing of the bankruptcy. The same applies to a portion of your salary determined under the Act. This portion, often referred to as “excess income,” is calculated according to guidelines from the Office of the Superintendent of Bankruptcy of Canada. You will, therefore, be able to keep a portion of your income to cover your basic needs.

Duration

The duration of a personal bankruptcy can range from 9 to 36 months, depending on your situation and income. That said, it may be longer if this is your third or subsequent bankruptcy.

Impact on Credit

Personal bankruptcy has a significant impact on your credit score. It remains on your credit report for several years, which may make it more difficult to obtain credit in the future.

However, if you are in bankruptcy, your credit rating may already have been affected. Bankruptcy is therefore an opportunity to start fresh and begin rebuilding your credit score.

Legal Consequences

Once you are discharged from bankruptcy, most of your debts will be discharged. Note that there are certain exceptions. As mentioned earlier, child support obligations and court-imposed fines are examples of debts that are not discharged.

Furthermore, throughout the process, you are also required to fulfill your obligations. These include providing certain financial information to your trustee, not taking on significant new debts without informing your trustee, and so on.

Is This the Only Solution?

During your first meeting with your trustee, they will assess your financial situation. Based on their assessment, they will determine the option that best suits your circumstances. If you have a low income and few assets, personal bankruptcy may be considered.

In addition, it is recommended that you consult a Licensed Insolvency Trustee to obtain advice specific to your situation. Filing for bankruptcy is considered a last resort. Other debt relief options can be explored before choosing this path, such as debt consolidation or a consumer proposal.

The Role of the Trustee

The trustee is your best ally if you are facing serious financial problems.

– Mathieu Roy, Licensed Insolvency Trustee

If bankruptcy is the best option, the trustee is responsible for gathering, preparing, and submitting all the necessary documentation. This includes preparing an inventory of the client’s assets, a list of creditors, financial statements, and more. The trustee is then responsible for filing the personal bankruptcy petition with the court.

In addition, the trustee notifies creditors of the pending bankruptcy and invites them to file their claims. Once the bankruptcy is in effect, your creditors can no longer undertake collection actions for the debts included in the bankruptcy. The trustee therefore also communicates with them to discuss the process and answer their questions.

The personal bankruptcy process is a complex and often difficult step in the life of someone facing financial hardship. Bankruptcy is not an end in itself, but rather the beginning of a new financial chapter. It offers a chance to be released from debt, start over, and rebuild financial stability.

Filing for bankruptcy can provide financial relief to those who need it. However, it should not be taken lightly. Consulting qualified professionals is crucial to rebuild your financial situation responsibly.

For more information about personal bankruptcy, contact one of our advisors at M. Roy & Associés today. Schedule an appointment by calling toll-free at 1-877-352-6661 or online by filling out the form for a free and confidential consultation.