Common myths and misconceptions about Bankruptcy

Unmanageable debt is stressful enough without the persistent half-truths and complete inaccuracies that prevent people from getting the relief they need and deserve. Bankruptcy, more than any other debt solution, often seems to be the target of these myths and misconceptions. Yet it is often the most cost effective, affordable, and fastest path to relief for many Canadians.

 

That’s not to say Bankruptcy is right for everyone, or that it’s not a serious and seriously impactful financial decision. But getting past some of these common concerns and questions is essential to understand whether it may be right for you.

Bankruptcy means I’m a failure

Most bankruptcies arise from issues beyond an individual’s control such as a job loss, medical debt, divorce, or similar family crisis. It’s not a sign of failure, it’s a sign a debtor has recognized their financial issues are beyond their control and chose to do something about it. From that perspective, Bankruptcy is a very mature response to an extremely stressful situation.

Bankruptcy will hurt my credit rating

It’s true that a first time Bankruptcy will reflect an R9 rating (worst) on a debtor’s credit report for six years following their discharge — and subsequent bankruptcies will remain for 14 years following their discharge. But that only tells part of the story.

By the time most people file their Bankruptcy they will almost certainly have been missing payments, receiving collections calls, overutilizing their credit accounts and acting in other ways that reflect poorly on their credit. The cumulative effects of these behaviours can be much, much more detrimental than a Bankruptcy.

Each missed payment, account in collection, etc. will also remain on the credit report for six years — so addressing numerous debt challenges through a Bankruptcy can be one of the fastest ways to begin rebuilding bad credit.

Creditors will take all my possessions

The bad news is debtors will have to part with some of their assets — potentially many of their assets depending on their situation. The good news is Bankruptcy law is structured to ensure debtors can maintain a reasonable standard of living throughout the process and after their discharge.

Each province has certain asset exemptions which outlines a dollar value in certain items debtors may keep. Our FAQ page outlines what these are in every province, and we outline B.C.’s below for illustrative purposes:

  • $12,000 equity in a principal residence in Greater Vancouver or the Capital Regional District; and $9,000 equity in all other areas of B.C.;
  • $5,000 equity in one motor vehicle (but only $2,000 if behind in family support obligations);
  • $4,000 in household furnishings;
  • $10,000 in work tools;
  • All necessary clothing and medical aids; and
  • Property in a registered plan (RRSP, RRIF or DPSP), except those contributions made in the 12- month period prior to Bankruptcy.

There are two other important factors to discuss here as well. One is that RESPs are exempt as a registered plan — the trustee will likely cash these in for the benefit of the bankrupt individual’s creditors. The other is that arrangements may be possible for the bankrupt individual to pay back non-exempt equity on a house or a vehicle; the details of how this would work are best saved for a case-to-case discussion with a Licensed Insolvency Trustee.

All my debts will go away

Bankruptcy will typically eliminate a wide range of debts including most credit cards, personal loans, lines of credit, mortgages, and vehicle financings. But some debts will survive a Bankruptcy, including:

  • Court fines, penalties and restitution orders;
  • Alimony, child support and maintenance;
  • Any award by the Court for intentional bodily harm, sexual assault or wrongful death;
  • Any debt or liability arising out of fraud, embezzlement, misappropriation or misconduct while acting in a fiduciary capacity;
  • Any debt or liability for obtaining property under false pretences or fraudulent misrepresentation;
  • Liability for any dividend a creditor would have been entitled to receive when a debtor failed to disclose the creditor to the trustee;
  • Student loans in certain circumstances.

A Licensed Insolvency Trustee will evaluate every debtors’ financial situation to advise whether Bankruptcy is the most effective option to address their unique profile of debts.

My creditors can choose not to participate in a Bankruptcy

While there are strict rules governing what debt collectors can and cannot do to secure payment of outstanding debts, scare tactics and misinformation remain one of their most persuasive and effective tools. If a debt doesn’t fall into one of the categories above it will almost certainly be included in a Bankruptcy whether the creditor likes it or not.

Creditors may object to a debtor’s discharge from Bankruptcy. However, the Court will expect this objection be made on reasonable grounds and reasonable evidence to support their petition. For this reason and others, it’s imperative that debtors fully disclose all debts at the outset of the Bankruptcy to ensure the legal integrity of the process. This includes everything from their mortgage to a $150 loan from a friend.

My employer can fire me for going bankrupt

It is illegal for an employer to fire a debtor for filing a Bankruptcy. In most cases an employer will not even be informed of a Bankruptcy unless there is a garnishee order in place. With that said, there are certain situations where a Bankruptcy may impact professional designations and/or professional duties, including for:

  • Lawyers
  • Chartered Professional Accountants / Financial Planners
  • Human Resource Professionals
  • Insurance Agents / Brokers

In such cases the restrictions are generally only in place as long as the Bankruptcy is active. However, it is best to discuss these matters with a Licensed Insolvency Trustee and/or an individual’s licensing body prior to entering Bankruptcy to determine whether an alternative option may be favourable.

What happens to my secured creditors?

A Bankruptcy will typically not impact the rights of secured creditors, who take precedence over the Licensed Insolvency Trustee in proceedings. If a secured creditor has valid security against the debtor’s property, they may take whatever action they deem appropriate (e.g. seizure, allow the debtor to continue making payments, etc.).

If a debtor cannot continue with the payments on a secured debt, they may surrender the asset to the creditor without the creditor pursuing the shortfall. In B.C. creditors also may not seize secured property and sue the debtor for the shortfall.

What happens to legal actions against me?

Bankruptcy places an immediate stay of proceedings on any current collections activity, Court judgements, and legal proceedings— save for those pertaining to debts which survive a Bankruptcy (above). Provided the debtor fulfills their Bankruptcy duties, stay of proceedings will remain in place until their discharge, at which point they will be released from their relevant debts and any creditor claims against them. 

Will my creditors continue to contact me?

As above, the stay of proceedings legally prevents any creditors included in a Bankruptcy from contacting a bankrupt individual. All contact must me made through the Licensed Insolvency Trustee.

Can I cancel my Bankruptcy if I change my mind?

It is possible to annul a Bankruptcy, but the process can be costly and time consuming as the Court is the only body with authority to do so. We recommend debtors communicate openly, ask many questions of a Licensed Insolvency Trustee, and fully understand the process prior to moving forward with a Bankruptcy