Don’t let fear drive you away from Bankruptcy
What do Walt Disney, Elton John, and Larry King have in common? After filing Bankruptcy, these and countless other respected cultural icons all went on to achieve fortune, fame, and overwhelming success. Financial challenges weren’t the end of their road. Rather, their Bankruptcy marked the beginning of a whole different — and objectively more productive — chapter in their lives.
Yet, the mere mention of Bankruptcy instills fear into the hearts of many. Perhaps it’s a fear of the unknown, fear of what other people will say, fear of losing things you’ve worked so hard to achieve — or fear the process will be difficult and overwhelming.
Fortunately, many of the fears people have about Bankruptcy are untrue, or at least greatly overexaggerated in many cases. As Walt, Elton, Larry, and many thousands of Canadians would attest, Bankruptcy can be the beginning of something new and better.
Following are five of the biggest fears Licensed Insolvency Trustees often hear about Bankruptcy and why these should never stop you from choosing the right debt solution for you and your family.
I will lose everything
Many individuals who file for Bankruptcy can (and do) keep their home and/or vehicle, provided they’re able to maintain their payments to creditors who hold security on these assets (i.e., mortgage, property taxes, vehicle loan).
Bankruptcy can even improve your chances of keeping certain assets because it stops unsecured creditors from trying to force their sale or garnishing your income. Furthermore, Bankruptcy often reduces or eliminates the amount you’re required to pay to unsecured creditors, thereby allowing you to better meet your home and auto loan obligations.
Every province has specific asset exemptions
Many assets are at least partially protected by so-called asset exemptions in a Bankruptcy. These are set out in various federal and provincial legislations and vary from province to province.
Across Canada, savings plans such as RRSP’s and Pensions are protected. Most provinces also include protection for various household goods and furnishings, personal property, tools of trade, as well as limited equity in a vehicle and personal residence. In Alberta homeowners are entitled to retain equity up to $40,000 in their personal residence and up to $5,000 in one vehicle.
Generally speaking, you must surrender assets in a Bankruptcy only if the equity value (i.e., the item’s sale price, less any amount owing to lenders for security) exceeds the provincial exemption amount. For example, a house worth $350,000 with an outstanding mortgage of $320,000 would have approximately $30,000 of equity. In Alberta, this value would be protected, meaning you would be able to keep the home if you so chose.
A Licensed Insolvency Trustee can help provide clarity
Many individuals struggling with debt are surprised to learn they do not have equity in assets over the exemption limit. There is therefore nothing to surrender, making Bankruptcy their fastest, most cost effective, and least disruptive option. Often, if there is a small amount of equity, it’s possible to arrange with the Licensed Insolvency Trustee to keep the asset and make payments to them for the equity.
A Consumer Proposal may be a good alternative to Bankruptcy in instances where a person has more equity than is protected and payments to the Licensed Insolvency are not feasible or affordable. This option provides many of the same protections as Bankruptcy, but also allows you to keep your assets by making an offer to your unsecured creditors to consolidate and settle your debt.
I’ll never get credit again or be able to buy a house
A common concern around Bankruptcy is the impact it will have on an individual’s credit score. People often fear they will never get credit again — especially a mortgage — because the R9 (worst) rating will remain on their credit report for at least six years.
When I hear this, I often share the story of a friend whose recovery I consider inspiring. This friend is an alcoholic whose addiction led them deep into debt which, once they were in recovery, it became clear there was no reasonable way they could repay. The astronomical payments would leave them homeless and unable to support themselves — so they filed for Bankruptcy. Within five years my friend qualified for a mortgage and purchased a home.
Obtaining credit after a Bankruptcy is not only possible, but a reality for many (if not most) people. In fact, the Bankruptcy process includes a requirement to attend two financial counselling sessions which include advice about how individuals can improve their credit rating and manage credit more effectively post-Bankruptcy.
Five steps to improve your chances of qualifying for credit after a Bankruptcy
- Complete all required Bankruptcy duties and obtain a discharge as early as possible.
- Obtain a secured credit card, use it frequently without exceeding about 30 percent of your available credit and be sure to always pay it off in full each month.
- Monitor your credit report and immediately correct any inaccuracies.
- Save consistently for a down payment and budget as if you were already paying for a house.
- Avoid the urge to overextend yourself. In other words, don’t borrow what lenders offer, but what you can afford now and if your income were to drop by 10 – 15 percent.
If my friend hadn’t filed for bankruptcy, they would likely never have been able to afford a house — and it’s possible they’d still be struggling to repay their high interest debt all these years later. Their credit would be in exponentially worse shape than it was immediately following their Bankruptcy, and they’d struggle to qualify for any new debt, much less a mortgage.
This is not to discount the immediate negative impact a Bankruptcy will have on your credit score. But depending on your situation, this may be preferable to the slow inevitable decline that occurs when you’ve maxed out all your available credit and are struggling to maintain all your payments.
A first Bankruptcy has a one-time impact on your credit rating which will typically disappear within six to eight years. Continuing to make payments but missing some or making them late will also reflect on your credit rating, but unlike Bankruptcy these will not all disappear at once — meaning it can take much longer for your credit to recover.
I might lose my job
Save for a handful of rather uncommon exceptions, there is no requirement for a Licensed Insolvency Trustee to contact your employer or advise them you’ve filed for Bankruptcy. Indeed, most people get through a Bankruptcy without their employer ever knowing.
Why might a Licensed Insolvency Trustee have to inform your employer of a Bankruptcy?
- A creditor is already garnishing wages. A Bankruptcy places an immediate stay of proceedings on collections actions including wage garnishments. The employer must be notified so they know to stop paying the creditors.
- A person in Bankruptcy fails to report their income and make the required payments to the Licensed Insolvency Trustee. The Licensed Insolvency Trustee may contact an employer to obtain information or payment directly.
- A person in Bankruptcy owes their employer money. As a creditor with proven claims, the employer has a right to know they’ve been included in a Bankruptcy proceeding.
There are several professions which require members to voluntarily disclose if they file a Bankruptcy — though these are relatively few. A Licensed Insolvency Trustee can help you understand the implications Bankruptcy may have for your career before deciding whether it’s the best option to resolve your debt. If there is a concern, a Consumer Proposal may be a better option as it often does not need to be disclosed.
What’s the counterfactual?
There’s another way to look at this fear which people too often overlook: What is the risk you will lose your job if you don’t get relief from your debt?
Unmanageable debt can often have a negative impact on your physical and mental health, your relationships, and your job performance. While your employer cannot terminate you for simply being in debt, they can terminate you for being excessively absent, inattentive, and disengaged from your work.
Having eliminated the stress of collections calls, living paycheque to paycheque, and a myriad of other debt-related distractions from their lives, many find they’re able to re-engage and excel in their work.
My family or friends will find out
In most cases, your family and friends will not find out about your Bankruptcy unless you choose to tell them or they are a creditor included in your filing. Although there is a publicly searchable record of all Bankruptcies, it’s unlikely a personal acquaintance would ever do so. Notice of most personal Bankruptcies is not published and typically provided only to your creditors by the Licensed Insolvency Trustee.
There can be exceptions to this rule, but they are rare and usually only arise when:
- An individual fails to cooperate fully with their Bankruptcy duties, or
- The Licensed Insolvency Trustee is called upon to investigate prior transactions which may contravene the principles of the Bankruptcy legislation.
I will be judged
Like most people, you’re almost certainly your own worst critic. Imagine a friend or family member confided in you that they were struggling with debt and chose to file a Bankruptcy — how would you respond? Presumably with compassion, empathy, and encouragement that they made the right decision. Do you have any reason to believe they’d respond differently to you?
The frustration you’re feeling with your situation (and perhaps with yourself) is normal. However, many years of experience have taught me the longer people suffer with their debt, the more they begin to identify with it as a part of who they are. Your desire to distance yourself from the problem of debt therefore often materializes in the misplaced thinking that others will want to distance themselves from you.
Yet, by not sharing your struggles with those closest to you, you’re the one keeping them at a distance — perhaps when you need them most. This is not to say you should tell every family member, friend, or acquaintance. Unfortunately, some people simply won’t understand. But that’s on them, not you. Be selective and share only with those in your life who have the capacity to love and support you.
The more people are willing to share their struggles, the more we can de-stigmatize the topic of debt and see Bankruptcy for what it is meant to be: An opportunity for honest but unfortunate debtors to get a fresh start, free from the overwhelming burden of debt.
Life happens. Debt happens. Bankruptcy can be an opportunity to turn the page on one unfortunate chapter and mark the beginning of something new and better. It may not be your only option, either. If you’re struggling with debt, schedule a Free Confidential Consultation to discuss your options with a Licensed Insolvency Trustee today. Together we’ll review your financial situation, discuss which strategies and solutions might work best for you and finally put your fears to rest.
