Paying down debt is an option for many consumers, but sometimes bankruptcy is the only real choice, says bankruptcy trustee Lana Gilbertson.
It’s often a life-changing event that triggers a financial crisis: Job loss, illness, a business deal gone wrong, divorce, or the birth of a child. Then the debt that someone was previously able to manage spins out of control. The car payment, house payment, and maybe the new furniture are all too much.
“I see people who have gotten in over their heads gradually. There are life changes, someone loses a job. People don’t come into this lightly. I see the feeling of failure,” says Gilbertson, who works with Meyers Norris Penny Ltd. in downtown Vancouver.
“The majority of the people I see are honest hard-working people. … They are able to recover from it.”
But there are consequences. A bankruptcy is permanently recorded with the federal Office of the Superintendent of Bankruptcy where records can be searched for a fee. It will also appear on the debtor’s credit record for six years after the bankruptcy is discharged.
It means losing assets to pay creditors, above a basic exemption. In B.C., a person who files for bankruptcy can keep their clothing, household goods, tools of their trade, a vehicle worth up to $5,000 and $12,000 in home equity in Metro Vancouver. RRSPs became exempt in 2008.
Declaring bankruptcy does not wipe out alimony and child support payments, student loans less than seven years old, court fines or debt that resulted from a fraud. It will, however, put a financial burden on anyone who has co-signed a loan to the debtor. Liability for repayment reverts to the cosigner during bankruptcy, usually a spouse or parents.
“They don’t feel like they got a get out of jail free card,” says Gilbertson. “I always say that bankruptcy is a last resort.”
That’s why Office of the Superintendent of Bankruptcy — which oversees the process in Canada–requires applicants to sit down with bankruptcy trustees to weigh their options. There are a series of steps (see box) that can be taken before filing for bankruptcy.
For people who have a steady income and an ability to make payments, a consumer proposal may make more sense, says Gilbertson. Changes to the federal regulations on consumer proposals that came into effect last fall increase the debt limit from $75,000 to $250,000, excluding mortgages.
Consumer proposals are designed to be palatable to creditors who get more money than they would if the debtor declared bankruptcy. The advantage for the debtor is to be able to keep assets– such as a home–provided they live up to the repayment deal.
Bankruptcies still outnumber the alternative, with the last available figures for B.C. showing 835 bankruptcies in October, compared to 254 consumer proposals.
And everyone pays their bankruptcy trustee for the service, either a percentage of assets sold or monthly fees that add up to about $1,800 during a nine-month period — the usual amount of time it takes to finish the process in a first-time bankruptcy.
The Office of the Superintendent of Bankruptcy offers plenty of advice to Canadians with money problems.
SEEING THE FACTS
You know you have a debt problem when you:
– Frequently pay bills after their due date.
– Regularly bounce cheques.
– Use an advance from one credit card to pay the minimum amount on another card.
– Receive a call from a collection agency.
– Regularly ask friends or family for loans.
– Have your utilities cut off.
– Have cut back on regular budget expenses such as clothing, recreation and sometimes even food.
– Are considering a second job in order to balance your budget.
– Make a budget.
– Consolidate your debts.
– Contact creditors to make a proposal for repayment. You can also ask a trained credit counsellor to do this on your behalf.
– If you’re having trouble making mortgage payments, talk to you bank.
– Sell some assets.
TO AVOID BANKRUPTCY
– Make a consumer proposal in which you pay off a portion of the debt or negotiate more time to pay off the whole debt.
Source: Office of the Superintendent of Bankruptcy Canada
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