For thousands of people all across Canada, bankruptcy is something to be avoided at all costs. Therefore, these Canadians spend countless hours exploring alternative solutions to declaring bankruptcy in Canada, without ever taking the time to learn what bankruptcy is all about. Were they to do so, they might learn in many cases bankruptcy is actually a sound choice for getting out from under a mountain of debt and starting over.
Creditors stand to lose most of what they are owed in Canada bankruptcy, so they rarely miss the chance to exaggerate the impact bankruptcy can have when they attempt to collect debts. They warn of credit loss and court action. These kinds of threats strike fear into the hearts of most Canadians, who are led to believe they need to stay out of bankruptcy court to protect themselves.
In fact, bankruptcy is one of only two alternatives that protects you from legal collection activity and does not eliminate your ability to get new credit in the future. The other legal alternative is a Consumer Proposal. A proposal is identical to a debt settlement plan where you repay your creditors less than the total you owe over an extended period. Licensed bankruptcy trustees in Canada handle both bankruptcy filings and consumer proposals.
Canadians need to get the facts straight about bankruptcy. Here are seven key facts all Canadians need to know:
1. You must be legally insolvent to file for a Canada bankruptcy.
2. Bankruptcy stops any legal collection activity underway against you.
3. Bankruptcy is not a free lunch.
4. No one does jail time for declaring bankruptcy.
5. Bankruptcy does not destroy your credit rating forever.
6. CRA debt can be erased in a Canada bankruptcy.
7. Canada bankruptcy eliminates student loans that are 7 years old.
To qualify for a Canada bankruptcy you must be legally insolvent. Insolvency is the inability to stay current with your bills through either your income or your assets. Some Canadians are misinformed about this requirement, thinking insolvency is restricted to income. If you have assets of sufficient value you could sell to repay the total debt you owe, you are not legally insolvent.
If your wages are currently being garnished or you are being sued in court for what you owe, declaring bankruptcy in Canada will stop those proceedings and prohibit your creditors from taking any further action against you.
Cost of Bankruptcy
A few Canadians have read that bankruptcy offers a fresh financial start by allowing filers to walk away from most of what they owe. While this is true, it does not come without cost. In addition, the costs are more than bankruptcy trustee's fees and court costs.
In principle, any Canadian who files bankruptcy must surrender his or her assets to the trustee at the time of filing. In practice, provincial laws supplementing the federal Bankruptcy and Insolvency Act (BIA) ensure no one loses all they own in a Canada bankruptcy.
Each province has its own exemption allowances for classes of personal assets. If an asset you own exceeds the allowance, you must surrender the asset to the bankruptcy trustee or, in some cases, you can "buy the asset back" by contributing the difference between the allowance and the value of the asset.
In addition, higher income filers may have to contribute some of what they earn while in bankruptcy. The government sets a living allowance for your family size and location and if your income exceeds the allowance by more than $200 in any given month, you will turn over a percentage to the bankruptcy estate.
This situation does not apply to low-income filers with no assets over the exemption allowances. The BIA recognizes that although debtors have a right to start over financially, creditors also have a right to be repaid part of what they are owed, according to the ability of the filer to pay.
Surrendered assets and surplus income go into an escrow account - the bankruptcy estate - that the trustee then distributes amongst your creditors with valid claims.
There are No Debtor's Prisons
No one does jail time for declaring bankruptcy. It is hard to imagine where this fear originates. Perhaps it is a combination of bankruptcy as a court proceeding and what people may read about surplus income. Some filers may fear they will go to jail if they have no income to contribute. This is absolutely, categorically, untrue.
Bankruptcy and Your Credit
Fear of credit loss is one of the principal reasons so many Canadians fear bankruptcy. The truth is bankruptcy can get you back on the road to a better credit history faster than any other debt settlement alternative. You should know that all debt settlement programs that involve changing the way you are currently repaying your creditors would result in a negative credit rating and the loss of the ability to get credit while you are in the program.
Once you successfully complete the program, you can start rebuilding your credit. Debt management and settlement plans take from three to five years to complete, while first-time filers can be discharged from bankruptcy in anywhere from nine to twenty-one months.
If you owe back taxes to the CRA, they can be eliminated in a Canada bankruptcy filing. The debt settlement plans you hear advertised so frequently these days cannot help you with CRA debt. Simply put, the CRA will not negotiate directly with credit counselors or debt settlement companies.
In 2009, the BIA was amended, reducing the time requirement for including student loans in a bankruptcy filing from ten years to seven years. If you have student loans less than seven years old, they cannot be discharged in a Canada bankruptcy. However, bankruptcy might still be a viable solution to your debt problems. Once you are discharged, the elimination of your other unsecured debt usually leaves enough disposable income to continue making payments on student loans.
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If you need advice on your Calgary bankruptcy problems, you can visit Bromwich & Smith at SolvingDebt.ca. You can also download their free ebook on 10 Things You Need to Know about solving your debt problems.
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