Michael Kane
Sun
In a continuing series on consumer decisions, Michael Kane looks at what’s involved in declaring bankruptcy
Canada‘s bankruptcy laws are designed to permit an honest but unfortunate debtor to obtain a discharge from his or her debts while treating creditors equally and fairly.
Last year, more than 100,000 individuals in Canada filed for personal bankruptcy or filed a bankruptcy proposal.
Bankruptcy is a legal proceeding that relieves an insolvent person of his or her financial obligations. A bankruptcy proposal lets a debtor restructure his or her financial affairs, often allowing for reduced payments and/or an extension of the time to pay.
Little or no increase is expected in this year’s bankruptcy numbers thanks to low interest rates, low unemployment and soaring real estate values. But with savings rates at record lows, numbers could spike if the economy turns downward.
WHO DOES IT
Filing bankruptcy is usually the last resort for people under siege by creditors. It is a powerful vehicle for a debtor to get a fresh financial start.
In almost all cases it is the result of a catastrophic event or set of circumstances, says Vancouver‘s Earl Sands, a trustee in bankruptcy and author of a newly published Bankruptcy Guide (pictured) from North Vancouver‘s Self-Counsel Press.
It could be a business owner whose company has failed, leaving him or her personally responsible for the business debts. Sometimes it is caused by an illness that prevents a person from working.
It could be because a person has lost his or her job and was forced to live off credit before a new job was found.
In some instances individuals succumb to the lures of gambling or tax evasion, and some students take on too much debt and then are unable to earn enough to pay it off.
Note that student loans cannot be erased by bankruptcy until 10 years after the completion of studies, although Ottawa is reviewing recommendations to reduce the waiting period to seven years as part of a bankruptcy reform package.
HOW IT WORKS
You can only go bankrupt or file a proposal if you use the services of a trustee in bankruptcy. You can locate a trustee by looking in the Yellow Pages or by visiting Sands’ website at www.BankruptcyCanada.com
There is an immediate stay of proceedings once bankruptcy is filed electronically with the Superintendent of Bankruptcy.
That means creditors cannot take any action to seize assets, other than those signed over as security in the event of non-payment. Nor can creditors seek a court order to garnishee wages. Collection calls also stop once the debt collector knows the individual has filed for bankruptcy.
In most cases only your creditors will know you have filed. Only in rare circumstances is a legal notice placed in the local newspaper.
In the most common type of personal bankruptcy, a creditors’ meeting is not held unless requested by the Official Receiver (Office of the Superintendent of Bankruptcy) or by creditors.
First-time bankrupts are entitled to a discharge after nine months, during which time they cannot be a director of a company, must make monthly payments to the trustee, turn in all credit cards, borrow no more than $500 from anyone without divulging they are bankrupt, report monthly income and expenses to the trustee including copies of pay stubs, and attend two counselling sessions on money management.
DISADVANTAGES
For a person facing a financial crisis, Sands says there are really very few disadvantages to bankruptcy. There is the argument that a bankruptcy adversely affects a person’s credit rating, but the reality is that the person going into bankruptcy will have such a bad credit rating that nothing will make it worse. In fact, the person will be a better credit risk after bankruptcy because he or she will have no debt.
WHAT IT COSTS
The payments a debtor makes in the nine months of bankruptcy are set by the government. Trustee fees come out of this amount. In the most common situations, the monthly payments are less than $200 a month for nine months.
Sands says most debtors keep all their assets. In B.C., bankruptcy exemptions include $12,000 in home equity ($9,000 outside Greater Vancouver and Victoria), $4,000 in household items, $5,000 equity in a vehicle (reduced to $2,000 if the debtor is behind on child-care payments), $10,000 in work tools, and essential clothing and medical aids.
Almost all debtors are discharged or out of bankruptcy in nine months, when most debts are erased. Exceptions are fines imposed by a court, money owing for things stolen, things obtained by misrepresentation, alimony or maintenance payments, damages awarded by a court for sexual assault or intentionally inflicting bodily harm, and student loans within 10 years after the completion of studies.
THE TRUSTEE
Some of the duties of the trustee in bankruptcy are to:
– Investigate the financial affairs of the bankrupt.
– Administer the bankruptcy estate to ensure the orderly and fair distribution of property among the creditors.
– Set aside any side deals or fraudulent transactions designed to hide assets from creditors or benefit one ordinary creditor over another.
– Sell any available assets.
– Recommend whether the bankrupt should be discharged. In rare cases, discharge can be withheld if the individual fails to meet his or her obligations outlined above.
REBUILDING CREDIT
Bankruptcy is a black mark on a person’s credit rating that stays on your credit bureau report for six to seven years.
However, Sands says a diligent person can rebuild his or her credit rating in as little as two years by following these tips:
– Talk to your banker and say you want to re-establish your credit rating.
– Open a savings account.
– Be a regular and persistent saver.
– Take out a small loan using the savings account as collateral and then pay it back.
– Apply for a credit card with a low limit, and secure the limit by using your savings account as collateral.
– Pay your credit-card balances on time.
Another little-known tip is that a debtor has the right to place a 50-word message on his credit report to explain why he or she declared bankruptcy.
© The Vancouver Sun 2005
