By Christi Posner
One of the biggest bankruptcy myths in Canada is that anyone can declare bankruptcy. Many Canadians actually find out that they can’t file for bankruptcy because they have either too much income or too many assets. If they did file for bankruptcy, it could be more expensive than repaying the debt.
An interesting debt relief interview even says that only 10% of the clients who see a trustee can file for bankruptcy. Let’s take a closer look at what bankruptcy is and why some people can’t file for bankruptcy.
What is Bankruptcy and Why Do People File for Bankruptcy in Canada?
Credit Counsellors hear a lot of questions about bankruptcy. People often ask what bankruptcy is and why people file for bankruptcy. To explain it very simply, bankruptcy is a legal process that can provide debt relief to those who are unable to repay what they owe. The process is administered by a bankruptcy trustee who is licensed by the Office of the Superintendent of Bankruptcy (OSB).
Why Can’t Some People File for Bankruptcy in Canada?
To answer the question, “Why can’t some people file for bankruptcy?” we need to look at how the Canadian bankruptcy process deals with someone’s assets, income, equity amounts in real estate, the number of people in their household and the types of debts they have. Unlike in the States, you don’t automatically lose your home if you declare bankruptcy. However, your circumstances will dictate if it will need to be sold or not. You also can’t declare bankruptcy for all types of debts.
If You Have Too Many Assets, They Will Be Sold
When declaring bankruptcy, your assets over a specified level will be sold, and your trustee will use that money to repay a part, or all of what you owe to your creditors. If you’d rather not sell your assets, you will be expected to pay your trustee the amount that would have been given to your creditors had the items been sold. Most people cannot afford to pay the amounts necessary to keep their items.
Assets that trustees will look at include, but are not limited to things like home equity, vehicles, tools of the trade and RRSP contributions. Each province has rules around how much of your home equity you are allowed to keep if you file for bankruptcy. If you have more, the trustee will sell your home and give the remaining proceeds to your creditors.
Unless you need your vehicle to do your job (e.g. courier), or if it’s only worth a modest amount, your vehicle may be sold to repay a portion or all of your debt. Your tools may be sold when declaring bankruptcy. Exceptions are sometimes made when your tools are required for your profession (e.g. mechanic). The amount you paid into your RRSP in the last 12 months will be taken back by your trustee and applied towards your debts.
High Income or Surplus Income - Must Meet Federal Guidelines
When declaring bankruptcy, the trustee will compare your household income to the federal guideline established for a household of your size. If your income is higher than this federal guideline, you may be required to pay 50% of your “surplus” income towards your debts each month for close to two years. This alone will repay a portion, if not all of, your debts.
Not All Debts Can Be Included in Bankruptcy – Student Loans, Secured and Non Secured Debts
Another reason why you may not be able to file for bankruptcy as a way to eliminate your debt is if you have debts that can’t be included in bankruptcy. Student loans, secured debts, and even some non secured debts may fall into this category. By not including certain debts, this means that the amount of debt you’re declaring bankruptcy on is less than what you may have thought. If that is the case, you need to decide if filing for bankruptcy is really the best option for your situation.
When Your Occupation is a Barrier
A final barrier to bankruptcy can be someone's occupation. If you work in finance, law enforcement, require a high security clearance, need to be bonded to do your job, or are licensed by a professional association, bankruptcy could jeopardize your occupation. Filing for bankruptcy now could also prevent you from moving into one of these occupations in the future as well.
Alternatives to Declaring Bankruptcy
Before you think about declaring bankruptcy, consider what assets are at risk, how much of your income will go towards repaying your creditors, and what your alternatives to bankruptcy are, such as:
There is no one-size fits all approach to dealing with debts. Many people believe that bankruptcy can be their last resort, but in many situations filing bankruptcy would still mean paying 100% of their debt back.
Contact a Non Profit Credit Counselling Organization for Help With Bankruptcy and Alternatives
A reputable non-profit credit counselling service can give you information so that you can determine if you want to file for bankruptcy or to consider alternatives. Remember that bankruptcy is the right solution for some people. Other people can’t file bankruptcy, or if they did, it would be a very expensive decision. Only you can decide what is best for you and your family, but make sure you have all of the options in front of you first!