Bankruptcy and Alternatives

If you must declare bankruptcy, your property is given to a trustee who then sells it and distributes the resulting money among your creditors. With certain exceptions, you’re no longer responsible for any debts you’ve accumulated. Despite all the stigma and hassles attached, bankruptcy may make good sense for people in certain situations. Sometimes, it’s the best way to get out from under and start over.

Bankruptcy Benefits

  • Certain debts are erased entirely (such as credit cards, personal loans, utility bills, and so on).
  • Creditors can no longer take legal steps to recover your debts (such as garnishing wages) and they can no longer threaten legal action against you.
  • You gain peace of mind—the sword of debt no longer hangs over your head.

Bankruptcy Costs

  • You must give up assets that exceed set exemptions.
  • You may be able to keep your car, depending on the provincial jurisdiction; however, you may be limited to a vehicle not exceeding $5,000 or you may need to provide proof that a vehicle is necessary for your work.
  • A co-signer on a loan with you immediately becomes responsible for your default.
  • Certain debts remain (such as student loans that are not greater than seven years old, child support, alimony payments, parking tickets, and so on).
  • Any future credit you obtain is likely to be more expensive.
  • You may have trouble getting bonded, which is a requirement for certain jobs.
  • Your bankruptcy remains on your credit report in most provinces for six to seven years from the date of your discharge.
  • Declaring bankruptcy costs money, from a few hundred to a few thousand dollars.

Declaring Bankruptcy

If you declare bankruptcy, you must:

  • Declare all assets and provide financial records to a bankruptcy trustee
  • Surrender all credit cards and designated assets
  • Cooperate with the bankruptcy proceedings
  • File, in association with the trustee, two tax returns in the affected calendar year
  • Comply with bankruptcy rules or risk serious penalties including jail time

The Bottom Line

Bankruptcy makes you a cash consumer; you’ll lose easy access to money via credit cards and loans. You’ll lose a great deal of privacy because you have to disclose all your financial data to a trustee with stiff penalties for withholding information and, every month, you’ll have to provide a spending and income report with receipts. For the period of the bankruptcy, the court may order you to pay (for distribution to your creditors) whatever income you have above what is required for necessities.