The Cost Of Bankruptcy

Many of our clients are dismayed to learn there will be costs related to their bankruptcy claim. Which is certainly understandable. Not only is the bankruptcy process often misunderstood, but it’s often the last stop on a long, stressful and expensive journey. By the time a person reaches our doorstep, the last thing they want to hear about is another service fee, another payment or yet another roadblock standing between them and their goal of being debt free. What they need is an opportunity for a financial fresh start. What they don’t want to think about are the potential sacrifices they may need to make to get there.

Contrary to popular belief, however, filing for bankruptcy does not automatically absolve you from all your debts. Rather, it is a process intended to provide you with a clean slate while acknowledging your creditors’ rights to recover some of the money that is owed to them. How your bankruptcy process will unfold and the associated costs will depend on several factors. These are described in greater detail below.

Income-Based Costs

When you file for bankruptcy, you will be required to disclose your income, expenses and information about your household to your Licensed Insolvency Trustee. These variables will be evaluated against a prescribed earnings threshold set by the federal government. Where you fall in relation to that threshold will determine if and how much income may be committed to your bankruptcy estate for the benefit of your creditors.

After considering several non-discretionary expense exemptions (e.g. childcare, child support, prescription medication, etc.), what you require to maintain “reasonable standard of living” will be determined. If a portion of your earnings falls above the prescribed income threshold, you will be required to contribute 50 percent of the surplus to your Licensed Insolvency Trustee over a fixed period.

Payments Resulting from Assets

You will also be required to disclose any assets you own. As with your income, you may be required to commit many of these assets to your bankruptcy estate for the benefit of your creditors. What assets you will be required to contribute to your bankruptcy claim will vary from province to province. Some exemptions exist to help you get a fresh start once your bankruptcy is discharged. Your Licensed Insolvency Trustee can help you better understand what will apply in your jurisdiction.

An example of a non-exempt asset is the equity in your home. In this case, your Licensed Insolvency Trustee will have your home appraised to calculate any equity available according to provincial legislation. Your creditors are entitled to have that value contributed to your bankruptcy estate.

There may be possessions you wish to retain (your home for example) which are not exempt. In this case, it may be possible to enter an agreement with your Licensed Insolvency Trustee to pay the equivalent value for these items into your bankruptcy estate so your creditors still receive their fair payment. Your Licensed Insolvency Trustee can help you understand what will apply in your unique circumstance.

Basic Administration Fee

Finally, the Bankruptcy and Insolvency Act of Canada allows Licensed Insolvency Trustees to charge a “prescribed fee” to individuals claiming bankruptcy. This fee is very reasonable and is a basic reimbursement for your Trustee’s operating costs and wages while also allowing them to make a small profit. How this fee will be paid depends on your financial situation throughout the bankruptcy process. If enough money remains in your bankruptcy trust after all creditors have received fair payment, it will be taken from there. If not, you will need to pay the fee upfront. If you are required to pay your administration fee out of pocket, your Trustee will work with you to establish a fair and reasonable plan.

After everything you’ve been through, learning the costs associated with bankruptcy can be difficult. You may be required to sacrifice some earnings or assets. But remember, this process will provide you with everything you need for a financial fresh start. Once your bankruptcy is concluded, you will be debt free and on the road to rebuilding your credit.

If you feel like bankruptcy may be the life changing debt-free solution you’re looking for, contact MNP for a free consultation to find out how we can help.