Five Myths Of Bankruptcy

Bankruptcy is one of the most anxiety producing words in the financial lexicon. It is also one of the most misunderstood. Unfortunately, many persistent myths and misconceptions prevent consumers who would benefit from bankruptcy to seek other, often counterproductive ways to deal with out of control debt.

If any of these myths are preventing you from taking steps toward your financial fresh start, I hope the following truths behind them will help you reconsider your options.

Myth One: You will lose all your assets

Contrary to popular belief, many of your assets may be protected under statutory exemptions in the event of a bankruptcy filing.

It is true all your non-exempt assets will vest with your Licensed Insolvency Trustee for the general benefit of your creditors. However, applicable legislation in your province will give consideration for your requirements to make a fresh start upon the discharge of your bankruptcy.

In Ontario, these exemptions include:

• Necessary clothing of the debtor and their dependents: unlimited
• Household furniture and appliances: $13,150
• Tools and personal property used to earn income – farmers: $29,100
• Tools and personal property used to earn income – all others: $11,300
• Motor vehicle: $6,600
• Equity in principal residence: $10,000  
• RRSP contributions made more than 12 months prior to filing the bankruptcy

Moreover, you may be able to repurchase the equity in a non-exempt asset you wish to keep from your Licensed Insolvency Trustee. For example, if you own a vehicle worth $10,000, you could potentially arrange to pay your Trustee $3,400 ($10,000 – $6,600 exemption) to retain your car.

Myth Two: You won't be allowed to leave the country or could go to jail

Filing for bankruptcy does not preclude you from leaving the country.

However, there are certain requirements you will need to meet to qualify for a discharge from bankruptcy. if you fail to attend counselling sessions, meetings of creditors (if required), or report your income or tax information because you were traveling, this may prevent you from obtaining your discharge from bankruptcy when you become eligible.

Similarly, you will not go to jail simply for filing a bankruptcy – even for failing to comply with certain duties.

However, you must act honestly and be truthful about your financial dealings before, during and after your bankruptcy. Hiding assets or debts, destroying documents, obtaining credit through misrepresentation or lying during an examination could result in charges and potential jail time.

Myth Three: You'll never be able to get credit again

This is really two myths in one, both of which are false.

One version proposes that lenders will refuse to give credit to bankrupt individuals. The other argues that bankruptcy completely disallows individuals from obtaining credit.

You are free to obtain new credit following a bankruptcy filing – While you must report on your application that you are an undischarged bankrupt, there is nothing preventing you from applying for new credit.

It is true that a bankruptcy will make it more difficult to obtain credit (but not impossible) – Filling for bankruptcy will downgrade each of the included debts to a "9", which is the lowest rating and will initially make securing new credit more difficult. However, this is not permanent.

If you are a first-time bankrupt, a record will remain on your credit report for the following six to seven years from the date of your discharge. If you are a second time bankrupt or more, the record will remain for 14 years.

It is possible to rebuild your credit during and following your bankruptcy – Secured credit cards and RRSP loans are two effective ways to improve your credit score. It is generally advisable to delay larger financial instruments like mortgages and new vehicle loans until you can access better terms and rates.

Myth Four: You cannot include tax debt in a bankruptcy

You may include many government debts – including personal income tax, harmonized sales tax (HST) and source deduction debt (including director liability) – in a bankruptcy. These would all be written off once you receive your discharge.

Myth Five: Bankruptcy is the only available option

You have options other than bankruptcy. Whether you opt for a Consumer Proposal or any number of other Life-Changing Debt Solutions, your Licensed Insolvency Trustee can help you choose the one that's right for you. Regardless of your choice, they can connect you with the resources you need to achieve your financial fresh start.

Help is Available

If you're feeling overwhelmed by debt and are considering bankruptcy, a Licensed Insolvency Trustee can help. Whether you want to better understand your options or are ready to take the next step toward a debt-free future, they can review your finances, explain your options and help you make the best choice for your unique situation. During a Free Confidential Consultation, you'll gain all the information you need to defeat debt for good.