Inflation and rising interest rates wreak havoc on household budgets. No wonder the number of bankruptcies is on the rise. What to do when you have to expect the worst?
More and more consumers are getting into a debt spiral from which they can no longer escape. “The people who come to see us have an average of $20,000 in credit card debt, which is around 20%. It is quickly becoming uninhabitable,” reveals Pierre Fortin, president of Jean Fortin et Associés, a licensed insolvency practitioner.
Under these conditions, bankruptcy may be the only way out.
How does it work?
A consumer must meet with an insolvency practitioner before being considered. He will compile a list of debts and draw up a budget to determine the financial capacity and level of indebtedness. His responsibility is then to advise the best escape route.
If possible, the administrator will prioritize the consumer proposal, from which 92% of the files are accepted. Otherwise, bankruptcy will be considered.
The administrator then sends a message to the creditors. Thus, the person comes under the protection of the law: the court proceedings are frozen and no interest is paid on the debts. If the creditors accept the administrator’s proposal, the bankruptcy is.
The law envisages mandatory two consultation meetings with the administrator. During the first, which takes place about a month after the bankruptcy, the administrator offers advice on preparing a budget and using the loan. Seven months later, the second session looks at 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 bankrupt’s income, at the end of which the debts are automatically discharged. For the second bankruptcy, it is 24 to 36 months.
Bankruptcy is not free.
If your net income (after taxes and certain obligations such as alimony and child care and medical expenses) is less than $2,500 per month, you will typically pay only $170 to $240 per month to the trustee for 9 months. These situations account for approximately three-quarters of personal bankruptcies.
If your net monthly income exceeds $2,500, you will pay 50% of the excess to pay off debts and trustee fees. For example, for a net monthly income of $3,500, you will pay $10,500, or $500 per month for 21 months. With a net income of $5,000, we are talking about $26,250, or $1,250 per month for 21 months.
However, these calculations differ if affected households have children, because federal family benefits, which are elusive, are taken into account.
Psychologically, bankruptcy is taxing. But for most, the liberation that comes with it is more empowering than the shame of failure.
Bankruptcy will damage your credit report for six years. “But when people consult with the administrator, the credit file is already greatly affected,” recalls Pierre Fortin. Many consumers have an R9 (worst) rating sometimes 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). However, the vast majority of bankrupts keep their furniture, clothes and, under certain conditions, their house and car (see box).
Some obligations are preserved despite bankruptcy, such as alimony, debts to ex-spouses, student debts under 7 years old or related to fraud, fine, civil liability penalty for physical or sexual assault. Finally, a misconception persists: tax debts will not survive personal bankruptcy.
When will you lose your house and car?
Going bankrupt does not automatically mean losing your home. Each case is unique, but the more the home is mortgaged, the less attractive the asset is to lenders. If the owner cannot pay the mortgage after bankruptcy, he must still hand over the keys.
You keep the purchased car if it is necessary for work, medical care or if there is no public transport. If it’s worth less than $5,000, creditors usually don’t seek to seize it. For a leased car, if the bankrupt cannot take over the lease after bankruptcy, he will lose his vehicle.
Debts that enter bankruptcy
• Outstanding credit card balances
• Credit lines
• Personal loans
• Tax debts
• Receivables from collection agencies
• Student debts under seven years old
What is elusive
• RRSPs and RRIFs (excluding contributions from the last 12 months prior to bankruptcy)
• $7,000 worth of furniture and personal effects (you will lose the piano but not your two children’s furniture, even if they are worth more than $7,000)
• Cash value of the life insurance if the beneficiaries are children or a married spouse (but not a legal partner)
• The tools you need for your work
• Food, clothes
What can be grasped
• House, apartment (except in certain circumstances)
• TFSA, CELIAPP, RESP (Registered Education Savings Plan)
• Furniture and objects that are the subject of the financing agreement
• Luxury or recreational vehicles (snowmobile, motorcycle, boat, ATV)